We describe the establishment of an embryoid-body-based protocol for hematopoietic/myeloid differentiation of human induced pluripotent stem cells that allows the generation of CD34+ cells or mature myeloid cells in vitro. Using this model, we were able to recapitulate the defective granulocytic differentiation in patients with severe congenital neutropenia (CN), an inherited preleukemia bone marrow failure syndrome. Importantly, in vitro maturation arrest of granulopoiesis was associated with an elevated unfolded protein response (UPR) and enhanced expression of the cell cycle inhibitor p21. Consistent with this, we found that CD34+ cells of CN patients were highly susceptible to DNA damage and showed diminished DNA repair. These observations suggest that targeting the UPR pathway or inhibiting DNA damage might protect hematopoietic cells of CN patients from leukemogenic transformation, at least to some extent.