The fate of pluripotent cells in early mouse embryos is controlled by graded Nodal signals that are activated by the endoproteases Furin and Pace4. Soluble forms of Furin and Pace4 cleave proNodal in vitro and after secretion in transfected cells, but direct evidence for paracrine activity in vivo is elusive. Here, we show that Furin and Pace4 are released by the extraembryonic microenvironment, and that they cleave a membrane-bound reporter substrate in adjacent epiblast cells and activate Nodal to maintain pluripotency. Secreted Pace4 and Furin also stimulated mesoderm formation, whereas endoderm was only induced by Pace4, correlating with a difference in the spatiotemporal distribution of these proteolytic activities. Our analysis of paracrine Furin and Pace4 activities and their in vivo functions significantly advances our understanding of how the epiblast is patterned by its microenvironment. Adding cell–cell communication to the pleiotropic portfolio of these proteases provides a new framework to study proprotein processing also in other relevant contexts.