Fungivory of mycorrhizal hyphae has a significant impact on fungal fitness and, by extension, on nutrient transfer between fungi and host plants in natural ecosystems. Mycorrhizal fungi have therefore evolved an arsenal of chemical compounds that are hypothesized to protect the hyphal tissues from being eaten, such as the protease inhibitors mycocypins. The genome of the ectomycorrhizal fungus Laccaria bicolor has an unusually high number of mycocypin-encoding genes. We have characterized the evolution of this class of proteins, identified those induced by symbiosis with a host plant and characterized the biochemical properties of two upregulated L. bicolor mycocypins. More than half of L. bicolor mycocypin-encoding genes are differentially expressed during symbiosis or fruiting body formation. We show that two L. bicolor mycocypins that are strongly induced during symbiosis are cysteine protease inhibitors and exhibit similar but distinct localization in fungal tissues at different developmental stages and during interaction with a host plant. Moreover, we show that these L. bicolor mycocypins have toxic and feeding deterrent effect on nematodes and collembolans, respectively. Therefore, L. bicolor mycocypins may be part of a mechanism by which this species deters grazing by different members of the soil food web.