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Proteolytic processing of cell-surface-bound ligands, called shedding, is a fundamental system to control cell-cell signaling. Yet, our understanding of how shedding is regulated is still incomplete. One way to increase the processing of dual-lipidated membrane-associated Sonic hedgehog (Shh) is to increase the density of substrate and sheddase. This releases and also activates Shh by the removal of lipidated inhibitory N-terminal peptides from Shh receptor binding sites. Shh release and activation is enhanced by Scube2 [signal sequence, cubulin (CUB) domain, epidermal growth factor (EGF)-like protein 2], raising the question of how this is achieved. Here, we show that Scube2 EGF domains are responsible for specific proteolysis of the inhibitory Shh N-terminus, and that CUB domains complete the process by reversing steric masking of this peptide. Steric masking, in turn, depends on Ca 2+ occupancy of Shh ectodomains, unveiling a new mode of shedding regulation at the substrate level. Importantly, Scube2 uncouples processing of Shh peptides from their lipid-mediated juxtamembrane positioning, and thereby explains the long-standing conundrum that N-terminally unlipidated Shh shows patterning activity in Scube2-expressing vertebrates, but not in invertebrates that lack Scube orthologs., Competing Interests: Competing interestsThe authors declare no competing or financial interests., (© 2017. Published by The Company of Biologists Ltd.)