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The implication of sideload mode is that you will not be using any online services, because you're sideloading everything. I'm honestly surprised that you can sync Instapaper content at all while sideload mode is active. I'm not really sure why you'd be OK with using an Instapaper account and not a Kobo account, but you probably can't suppress any prompts to sign in, since the device may be confused by your use of Instapaper without a Kobo account. Normally, a sync in sideload mode will retrieve dictionaries and firmware updates and nothing else.
If I'm not mistaken, you can just connect USB immediately when you get the set-up screen, and you should gain access to the filesystem to restore your configuration.
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