Beyond the non-compete clause, there also is usually a "assignment-of-inventions" agreement. Which, to some degree, means if you are in a role where you might "invent" things, anything you think of while at the company is owned by the company whether you told them about it or not. The contracts can get complicated: if you have an idea completely unrelated to the company's business, and can prove you did not use any company or equipment or time, you might be ok.
Saying "I had the idea for Reader but I would not tell Google because they would ruin it, and I would instead quit and form my own company" is exactly what these agreements are aimed at.
You're not allowed to compete with the company you used to work for or use your "proprietary knowledge" to undercut it. There's lots of potential reasons companies claim, some legit and some not:
1. I have training or specialized skills I acquired at the companies expense and I will be using them to compete against the company.
2. I have "insider knowledge" that they believe would amount to corporate espionage.
3. I know something that could cause harm to the company or its clients (ex. I used to do tech support for a series of store chains and I was not allowed to work for them upon leaving because my knowledge would make it trivially simple for me to steal from the store).
Those are just some of the thought processes. I don't think it's that you couldn't make money self employed, but you couldn't make it doing the same thing you were doing for your former employer (i.e. making a feed reader).
I think you just can't "compete" with your former employer for X years after leaving, i.e. building a product that is doing the same thing one of their products is doing.
It's called a no-compete clause, and has very specific language about not making a product that'd be in the same space as something the company you just left makes.
Non-compete clauses are very limited and hard to enforce in California (where most Google employees reside.) Assignment-of-invention might apply but if the individual has left the company (rather than building it in their free time while still employed) it would probably be very hard to prove that the original idea happened while they were still in the employ of the company, unless they documented it and shared those docs internally. (i.e. you can't pitch the idea internally, and then if rejected quit and build it yourself.)
