Valproic acid (VPA) is an effective and widely used anti-seizure medication but is teratogenic when used during pregnancy, affecting brain and spinal cord development for reasons that remain largely unclear. Here we designed a genetic recombinase-based SOX10 reporter system in human pluripotent stem cells that enables tracking and lineage tracing of Neural Crest cells (NCCs) in a human organoid model of the developing neural tube. We found that VPA induces extensive cellular senescence and promotes mesenchymal differentiation of human NCCs at the expense of neural lineages. We next show that the clinically-approved drug, Rapamycin, inhibits AP1-mediated senescence and restores aberrant NCC differentiation trajectory in human organoids exposed to VPA. Notably, in vivo validation in developing zebrafish highlighted the therapeutic promise of this approach. Collectively our data identifies a novel mechanism for VPA-associated neurodevelopmental teratogenicity and a potential pharmacological preventative strategy. The results exemplify the power of genetically modified human stem cell-derived organoid models for drug discovery and safety testing.