The founding father and preeminent figure in Bhutanese Buddhism was Padmasambhava - Guru Rinpoche, "the precious master". The major growth of Buddhism in Bhutan began with his arrival in the eighth century. Born in the Swat province of what is now Pakistan, he became a Buddhist tantric master and brought numerous teachings to Tibet and throughout the Himalayan Buddhist world. His wisdom laid the firm foundation for Buddhism's spread in Bhutan, where he traveled fairly extensively, left countless stories about his subduing of local demons and deities, and was the founding inspiration for many sacred sites, notably Taktsang Lhakhang in Paro and Kurje Lhakhang in Bumthang. Guru Rinpoche is widely revered as the second Buddha, and his followers, later known as Nyingmapas, "the ancients", constituted the first Buddhist school in Tibet.

Following this initial impetus, Buddhist belief steadily spread throughout the land achieving a degree of hegemony. The ninth and tenth centuries were a period of political turmoil in Tibet, and marked the almost total disappearance of Buddhism in the region. It was only in the eleventh century that there was a renaissance, and what is called "the period of the second diffusion of Buddhism" commenced. Numerous competing schools arrived in Bhutan, founding monasteries, gathering followers and gaining both spiritual and temporal authority in respective parts of the country. Of these, the Drukpa Kapyupas and the Nyingmapas were to achieve some ascendancy. The Drukpa Kagyupa School was introduced to Bhutan by Phajo Drukgom Shingpo (1184-1251), who was instrumental in achieving initial dominance in the west, and whose descendants solidified both spiritual and temporal power. The Nyingmapa School had been present in Bhutan since the time of Guru Rinpoche, and gradually widened their sphere of influence in the central and eastern regions through a series of significant figures and an emerging religious nobility descended from the families of important saints.

The period up to the seventeenth century was a time of Buddhist dissemination, as Bhutan became a sanctuary for the "three jewels" - the Buddha, the Dharma (his teachings) and the Sangha (his followers). This was epitomized by the presence of figures possessing the power to inspire both local leaders and the popular masses. Longchen Rabjampa (1308-1363), the greatest Nyingmapa philosopher, chose exile in central Bhutan following a dispute with his Tibetan master. Dorje Lingpa (1346-1405), one of the foremost Tibetan tertons or treasure revealers, settled in Bumthang. However, the figures that are most recalled are probably Drukpa Kunle (1455-1529) and Pema Lingpa (1450-1521). Drukpa Kunle, the "divine madman", is a Bhutanese folk hero, famous for the unorthodox and often outrageous ways in which he taught religion. Wandering through Tibet and Bhutan as a yogi, his style of teaching, particularly accessible to the common man, was a reaction against the dogmatism of the clergy and rigid social conventions, which he saw as being impediments to the grasping of the true meaning of the religion. He remains the subject of a host of anecdotes in which sex plays a defining role. Pema Lingpa, born in Bumthang of noble Nyingmapa birth, was the first Bhutanese-born religious figure to gain significant fame throughout the Tibetan Buddhist world. In a vision of Guru Rinpoche he attained prophecies for the discovery of a number of hidden teachings, thus becoming a great terton.