Tom,
I run a similar setup that you're trying to do. Here's what I have in Startwatch:
Program: C:\Program Files (x86)\Eterlogic.com\Virtual Serial Ports Emulator\VSPEmulator.exe
Params: c:\vspeconfig.vspe -minimize -hide_splash
vspeconfig.vspe in my config file. As you can see, it's located in my root directory, C:\ . It's been a couple of years since I set this up, but, if I recall, that's the only place I could put it and get it work.
Steve