Cell microencapsulation has been utilized for decades as a means to shield cells from the external environment while simultaneously permitting transport of oxygen, nutrients, and secretory molecules. In designing cell therapies, donor primary cells are often difficult to obtain and expand to appropriate numbers, rendering stem cells an attractive alternative due to their capacities for self-renewal, differentiation, and trophic factor secretion. Microencapsulation of stem cells offers several benefits, namely the creation of a defined microenvironment which can be designed to modulate stem cell phenotype, protection from hydrodynamic forces and prevention of agglomeration during expansion in suspension bioreactors, and a means to transplant cells behind a semi-permeable barrier, allowing for molecular secretion while avoiding immune reaction. This review will provide an overview of relevant microencapsulation processes and characterization in the context of maintaining stem cell potency, directing differentiation, investigating scalable production methods, and transplanting stem cells for clinically relevant disorders. Biotechnol. Bioeng. 2013; 110: 667–682. © 2012 Wiley Periodicals, Inc.