There's a process where you declare this work. And if it gets approved, you have ammunition to back you in a court case if it ends up going to such lengths.
I have had projects approved - questions that get asked are about e.g. conflict of interest or actual competition.
Google actually doesn't want to own your fruit-stand-in-the-park business.
This is intended to prevent situations like the zuck/winklevoss case (just to name 1 publicly well known example).
But when someone is spending the time Google pays for to work on a startup, I would THINK they would care about that. Or maybe Google's internal processes is okay with them doing 1 hr/day of work "as long as they're getting done whats expected of them."
The decision is not made based on whether the work is a "startup" or not. It's not even clear what a startup is - some companies that are worth more than $1 Billion are still somehow "startup".
It's based on conflict of interest, legitimate business competition, leaking/selling sensitive information, and other concrete criteria, in my opinion, are quite fair.
It does not depend on whether it is a "startup" or not