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The evolution of multicellular life spurred evolutionary radiations, fundamentally changing many of Earth’s ecosystems. Yet little is known about how early steps in the evolution of multicellularity affect eco-evolutionary dynamics. Through long-term experimental evolution, we observed niche partitioning and the adaptive divergence of two specialized lineages from a single multicellular ancestor. Over 715 daily transfers, snowflake yeast were subjected to selection for rapid growth, followed by selection favouring larger group size. Small and large cluster-forming lineages evolved from a monomorphic ancestor, coexisting for over ~4,300 generations, specializing on divergent aspects of a trade-off between growth rate and survival. Through modelling and experimentation, we demonstrate that coexistence is maintained by a trade-off between organismal size and competitiveness for dissolved oxygen. Taken together, this work shows how the evolution of a new level of biological individuality can rapidly drive adaptive diversification and the expansion of a nascent multicellular niche, one of the most historically impactful emergent properties of this evolutionary transition.