Coffee Stain Studios was founded in 2010 in Skövde, Sweden, by a group of nine students at the University of Skövde: Anton Westbergh, Johannes Aspeby, Mikael Mård, Oscar Jilsén, Gustaf Tivander, Daniel Lundwall, Markus Rännare, Joakim Sjöö and Stefan Hanna. Their first game, I Love Strawberries, was released at the end of that year for iOS by Atari.
In 2010, Coffee Stain participated in "Make Something Unreal", a modding competition for Unreal Tournament 3 held by Epic Games and Intel, with its mod, Sanctum. The mod was received well, leading Coffee Stain to adopt the Unreal Development Kit to develop Sanctum into a standalone game. In March the following year, the company struck a five-year licensing agreement with Epic for their Unreal Engine 3 technology. Sanctum as a standalone game was released in April 2011, and was followed by a sequel, Sanctum 2, in May 2013. In February 2014, Coffee Stain acquired the rights for I Love Strawberries from Atari and re-released the game for iOS with some improvements.
Coffee Stain gained significant recognition with their April 2014 release of Goat Simulator. While the title received mixed critical reviews, as it was released in a purposely buggy state to take advantage of its ragdoll physics, it became highly successful through Let's Play videos and live streamers. By August 2014, Goat Simulator had outperformed all sales of the studio's previous games combined, and had generated over US$12 million in revenue by March 2016.
On 23 February 2017, Coffee Stain announced Coffee Stain Publishing, a subsidiary that would act as the publishing entity within the Coffee Stain group. The first title to be released through Coffee Stain Publishing was Huntdown by Swedish development team Easy Trigger Games. The following day, Coffee Stain acquired a minority stake in Danish developer Ghost Ship Games, and became the publisher of their upcoming game, Deep Rock Galactic. In April 2017, Coffee Stain also gained a minority stake in newly founded Gothenburg-based studio Lavapotion. In July 2017, Daniel Kaplan, the first employee of Swedish developer Mojang, left Mojang to join Coffee Stain Publishing.
On 30 January 2018, Coffee Stain announced Levelling the Playing Field, a funding initiative aimed at small companies that employ at least as many women as men and require at most 1 million kr (about $127,000) in funding. Through this initiative, Coffee Stain invested in Danish developer Other Tales Interactive (a team of two women) in exchange for a minority stake. A second studio, Stockholm-based Kavalri, was invested in under this programme in November 2019. The following day, Coffee Stain acquired a majority stake in Gone North Games, a Swedish developer that had developed Coffee Stain-published and downloadable content for . With the acquisition, Gone North Games was rebranded as Coffee Stain North.