California specifically has laws that allow employees to claim "inventions" of their own but still under terms that are more favorable to the employer [2]. There's no help for "copyrightable" works [3], which would include software, or even in principle a written plan for developing this software [4].
I certainly have this issue currently preventing me from doing any work to bootstrap while I am still employed. Most people I spoke to at SUS2010 who are working on "side projects" are completely unaware of the issue. Some are ignoring it thinking that it must somehow work out. Yet, I noted that YC submission form has a question about this.
On the other hand, almost every successful founder I spoke to, either did not have this issue (founded right after school, etc.), or did not do any work before quitting (which they did either before or after securing funding).
Some more details on the subject can be found in this excellent book: http://www.amazon.com/Intellectual-Property-Open-Source-Protecting/dp/0596517963/
Here are some questions then:
How many people here have or had these issues?
How do/did you deal with this?
Is leaving the day job the only way out? Or possibly joining another job where you can avoid this issue, as kneath suggested [1]? Consulting jobs?
[1] Note: I had posted the same question as a comment to "Ask Tom Preston-Werner" on HN recently (http://news.ycombinator.com/item?id=1804443 and http://news.ycombinator.com/item?id=1805871). Am now opening to a wider set of readers and responses.
[2] See section 2870(a)(1), and 2872 (burden of proof) here: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=lab&group=02001-03000&file=2870-2872
[3] See: http://en.wikipedia.org/wiki/Work_for_hire ("Within the scope of employment" here means not just work you do for the employer, but also anything you do that relates to the "field" of your work)
[4] In fact, even non-copyrightable and non-patentable works (whatever these mean) are included under this by my employment contract.
Reason for edit: Footnotes used asterisk before instead of [Number], where were misinterpreted by the system.