The first cell differentiation in mammalian embryos segregates polarized trophectoderm cells from an apolar inner cell mass (ICM). This lineage decision is specified in compacted morulae by cell polarization and adhesion acting on the Yes-associated protein in the Hippo signaling pathway, but the regulatory mechanisms are unclear. We show that morula compaction and ICM formation depend on PC7 and the related proprotein convertases (PCs) Furin and Pace4 and that these proteases jointly regulate cell-cell adhesion mediated by E-cadherin processing. We also mapped the spatiotemporal activity profiles of these proteases by live imaging of a transgenic reporter substrate in wild-type and PC mutant embryos. Differential inhibition by a common inhibitor revealed that all three PCs are active in inner and outer cells, but in partially nonoverlapping compartments. E-cadherin processing by multiple PCs emerges as a novel mechanism to modulate cell-cell adhesion and fate allocation.