When I ran my design studio at it's height of 80 people I would encourage everyone to have side projects. When you reach that size people coming and going starts to become the norm. Just as each employer is not going to be valued as when you are a much smaller company, neither should the employee be forced to some sort of fake commitment to a company who is no longer able to care for others as a small tight band of brothers might do. So it's better to have people be able to do whatever they like to do in life. It's up to you to capture as much value out of them as possible and it's often quite telling about the position they have whether they end up wanting to spend more time on sideprojects than their main one.

You have to expect people leaving you, because the reasons they join a bigger company is much different than a smaller one and it's quite shortsighted as a CEO of a company of the size of fog creek to think like that.

Luckily there are other companies doing great encouraging side projects too.