* The lawsuit may make it more difficult for Shred Video to raise funding, but the linked writeup and YC's blog post don't exactly show Smule in a positive light. The "if we're wrong, we'll win" quote from Smule is telling. I'd want a very good explanation of this mess before entering into a partnership with Smule.
* Smule is warning that any employees using company property on company time to build their own startups exposes them to legal liability. This is a perfectly reasonable position. (Note I'm not saying that Shred's founders did that, only that Smule's point is correct as far as it goes.)
* California law in particular is more startup- and founder-friendly than most and makes some elements of employment contracts unenforceable as a matter of public policy. It likely doesn't apply here, but it does mean if you build and sell, say, drones in your spare time while working a California pharmaceutical company, that employer wouldn't have an IP claim (even if the employment agreement was broad).
* Shred's founders should have made a clean break and not retained any hardware or access to code after they left. That's what I did when I quit my job at a large publicly traded company last year to found https://recent.io -- I returned the work laptop on my last day and haven't done any work for them since. But this is hindsight, I know!