Academics, the media, and policy makers have all raised concerns about the implications of human workers being replaced by machines or software. Few have discussed the implications of the reverse: firms' ability to replace capital with workers. We show that this flexibility can help new firms overcome uncertainty and increase entrepreneurial entry. We develop a simple real options model where permissive labor regulations allow firms to take advantage of capital-labor substitutability by replacing “rigid” capital with “flexible” labor. The model highlights institutional, technological, and organizational preconditions to using this flexibility. Using a large and comprehensive data set on entry by stand-alone firms and group affiliates, we provide evidence in support of the model.