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During the evolution of multicellularity, the unit of selection transitions from single cells to integrated multicellular cell groups, necessitating the evolution of group-level traits such as somatic differentiation. However, the processes involved in this change in units of selection are poorly understood. We propose that the evolution of soma in the volvocine algae included an intermediate step involving the plastic development of somatic-like cells. We show thatEudorina elegans,a multicellular volvocine algae species previously thought to be undifferentiated, can develop somatic-like cells following environmental stress (i.e. cold shock). These cells resemble obligate soma in closely related species. We find that somatic-like cells can differentiate directly from cold-shocked cells. This differentiation is a cell-level trait, and the differentiated colony phenotype is a cross-level by-product of cell-level processes. The offspring of cold-shocked colonies also develop somatic-like cells. Since these cells were not directly exposed to the stressor, their differentiation was regulated during group development. Consequently, they are a true group-level trait and not a by-product of cell-level traits. We argue that group-level traits, such as obligate somatic differentiation, can originate through plasticity and that cross-level by-products may be an intermediate step in the evolution of group-level traits.