I imagine it's not appropriate for startups, since they're burning money fast and mental health appppears to be less of a priority? I've not worked at one, so hard to say.

Besides startups, I think it's fair play at companies of all sizes. Employees are the most important thing to companies, and the overhead of losing trained, context-carrying talent tends to be heavy. So, why not let them fulfill that scratch and keep them at your company.

I've seen some companies allow 20% on any team within the company (rather than any project whatsoever): that could be a nice middleground for a company that is unsure about the whole thing.