Multicellular differentiated organisms are composed of cells that begin by developing from a single pluripotent germ cell. In many organisms, a proportion of cells differentiate into specialized somatic cells. Whether these cells lose their pluripotency or are able to reverse their differentiated state has important consequences. Reversibly differentiated cells can potentially regenerate parts of an organism and allow reproduction through fragmentation. In many organisms, however, somatic differentiation is terminal, thereby restricting the developmental paths to reproduction. The reason why terminal differentiation is a common developmental strategy remains unexplored. To understand the conditions that affect the evolution of terminal versus reversible differentiation, we developed a computational model inspired by differentiating cyanobacteria. We simulated the evolution of a population of two cell types –nitrogen fixing or photosynthetic– that exchange resources. The traits that control differentiation rates between cell types are allowed to evolve in the model. Although the topology of cell interactions and differentiation costs play a role in the evolution of terminal and reversible differentiation, the most important factor is the difference in division rates between cell types. Faster dividing cells always evolve to become the germ line. Our results explain why most multicellular differentiated cyanobacteria have terminally differentiated cells, while some have reversibly differentiated cells. We further observed that symbioses involving two cooperating lineages can evolve under conditions where aggregate size, connectivity, and differentiation costs are high. This may explain why plants engage in symbiotic interactions with diazotrophic bacteria.