What does the phrase "as not to discourage them too much" mean here, who are "them"?

Rebellion in its less violent forms is a good thing, is the point being made.  Rebellion is not the cause, it is the symptom.  The cause is "encroachment of rights of the people".  The phrase calls on us to remember that cause, and not punish the rebellion so harshly that it stops people from standing up for their rights. The rebellion is an unwanted and undesirable consequence of a people feeling that they are being subjugated.  We want people to fight against subjugation, we just do not want it to be open and violent rebellion if that can be avoided.  If you punish too harshly, the punishment becomes more about the refusal to allow subjugation (adding to subjugation, the problem to begin with) rather than simply maintaining peace.

A government that performs too much subjugation is not a healthy government.  Sometimes a fever is a good thing, because it means that the system is fighting the disease.  Eliminating the fever is not always the best thing to curing the disease.  Some fever is necessary.  Excessive fever is itself dangerous so should be reduced if possible, but fever is not of itself dangerous. It is only dangerous in excess.

The "them" are the participants of the unsuccessful rebellions.  He's saying that if you crack down on a rebellion too hard by imposing draconian measures, those are the "encroachments on the rights of the people," that they withdraw/don't participate in civil society anymore (and so go off to plot another rebellion feeling hard done by the draconian measures).  He's saying don't come down so hard on rebels that you end up with fewer civil liberties than before the rebellion started.