Twelve putative sesquiterpene synthases genes were found in clades along with enzymes with 1,6-, 1,10-, and 1,11-cyclase activities in the genome of Flammulina velutipes. Chemistry investigation of F. velutipes led to the identification of two seco-cuparane sesquiterpenes, flammufuranone A (1) and B (2); 13 new sesquiterpenes with nor-eudesmane, spiroaxane, cadinane, and cuparane skeletons (3-14, 16); as well as two new ergosterol derivatives (17 and 18). Sesquiterpenes (3-14) derived from 1,10-cyclizing enzyme were first reported from this mushroom. The absolute configurations in 1 (3R,7S) and 2 (3R,7R) were assigned by electronic circular dichroism (ECD) calculation. The absolute configuration in 3 was confirmed by X-ray diffraction analysis. The absolute configurations in the 1,2-diol moiety of 13, and in the 1,3-diol moiety of 17 and 18 were determined using Snatzke's method. Among these compounds, 3, 5, 13, and 14 were found to inhibit the HMG-CoA reductase with IC50 of 114.7, 77.6, 55.5, and 87.1 μM, respectively. Compounds 5, 6, 7, 10, 13, and 14 showed DPP-4 inhibitory activity with IC50 of 75.9, 83.7, 70.9, 79.7, 80.5, and 74.8 μM, respectively. The biosynthesis for sesquiterpenes in F. velutipes was also discussed.