For training, a Vmc demonstration mirrors the certification requirements of the airplane. In certification, Vmc is that speed at which it's no longer possible to maintain directional control at the most unfavorable weight and CG, with the critical engine suddenly made inoperative (and windmilling) and the "good" or operative engine producing maximum available takeoff power. The Landing gear is retracted, and the flaps in the takeoff position.
The airplane must be airborne and out of ground effect. Cowl flaps must be set for takeoff. The airplane should be trimmed for takeoff. A maximum of 5 degrees bank into the good engine is allowed.
Note that the Vmc demo is designed around a worst-case scenario; an engine failure on takeoff. Slow, configured for takeoff, max power. It disadvantages the airplane a little by putting the gear up, removing the stabilizing effect that the gear provides.
Set the flaps as you would for takeoff.
Normally, in a training environment (especially when doing Vmc demos), you won't have passengers in back, and often you won't have an aft CG. You'll be at altitude, where the actual loss of control occurs at a lower airspeed, and so forth...so you're not going to get the absolute worst-case performance. However, you can set up the demo per the standard, because what you're really showing the student is basic handling with an engine out, and most importantly, the need to remove power on the operating engine(s) when aerodynamic control has reached it's limit.
My personal belief is that for safety's sake, there is no need to allow the aircraft to reach the point of departing controlled flight. Blocking the rudder in order to cause the departure to occur a little earlier is a wise move. Give the student some rudder, and as a prudent instructor, you keep the rest.
By allowing the student only so much rudder travel in countering the assymetrical thrust, the departure will occur at a higher speed, and if the student doesn't get the power pulled back soon enough or mishandles the event, you still have rudder available simply by releasing your foot pressure.
Cheap insurance against murphy and students alike, and you're right-minded in considering the relationship to the departure vs. the stall.
There was a time years ago when single engine stalls were practiced as part of the training curriculum, and I still run into those who believe to this day they still ought to be. I'm of the school that believes otherwise (kind of along the same lines that one doesn't need to try cocaine to know it's bad for one and that jumping off bridges could hurt,without actually having to try it). Really the whole Vmc training is as much to show the student why they shouldn't go there as it is to teach any kind of recovery, and that whole effort should be done safely.
