No need to update beforehand. 5.13.6 is compatible with the WatchThis JB.
And yes, when you factory reset it will completely erase all your books on your device. If they were purchased through Amazon you can simply redownload them. If they were sideloaded, you will want to make sure to back them up first.
As far as what to install, you will want to install KUAL to launch your apps. I would also recommend you install the renameotabin extension to block OTA updates and KoReader so you can read epubs and pdfs.
There are really no disadvantages to jailbreaking your device. It will function exactly as it normally does, you just have full control over your device. But with this power comes the risk of bricking your device is you start messing with system files. As long as you follow all instructions and only use trusted programs and extensions you should be fine.
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