First of all, restricting contracts to only work related to the company's business is not unheard of (even outside of California). Every company I've worked at has agreed to that.
Secondly, it ignores the abundant evidence that people successfully turn side projects into businesses all the time without being sued by their ex-employers. In fact, I'd even posit that the median startup is begun while the founder is still working for someone else.
Don't sign draconian contracts and don't be afraid to work on side projects. Be mindful of Joel's bias (he's a CEO, not a developer).