The two main functions of the ovary are the production of oocytes, which allows the continuation of the species, and secretion of female sex hormones, which control many aspects of female development and physiology. Normal development of the ovaries during embryogenesis is critical for their function and the health of the individual in later life. Although the adult ovary has been investigated in great detail, we are only starting to understand the cellular and molecular biology of early ovarian development. Here we show that the adult stem cell marker Lgr5 is expressed in the cortical region of the fetal ovary and this expression is mutually exclusive to FOXL2. Strikingly, a third somatic cell population can be identified, marked by the expression of NR2F2, which is expressed in LGR5- and FOXL2 double-negative ovarian somatic cells. Together, these three marker genes label distinct ovarian somatic cell types. Using lineage tracing in mice, we show that Lgr5-positive cells give rise to adult cortical granulosa cells, which form the follicles of the definitive reserve. Moreover, LGR5 is required for correct timing of germ cell differentiation as evidenced by a delay of entry into meiosis in Lgr5 loss-of-function mutants, demonstrating a key role for LGR5 in the differentiation of pre-granulosa cells, which ensure the differentiation of oogonia, the formation of the definitive follicle reserve, and long-term female fertility.