Exactly how I handle it. My proofs are always watermarked, but once the client pays for the pics, I remove the watermark and provide them with a "release to print" up to a certain size. Think about it... a family hires me for portraits as they want to display their family at work, around the house, etc. They don't want to display my watermark.
Even so, I choose to make my watermark as unobtrusive as possible, but still evident, even on the proofs. That way, those few folks that contract me can see the true feel of the photo. After that, it just helps keep honest folks honest, and when I tag folks on facebook for their proofs, gives me a little advertisement to everyone who sees.