The surface chemistry of nanoparticles is a key step on the pathway from particle design towards applications in biologically relevant environments. Here, a bilayer-based strategy for the surface modification of hydrophobic nanoparticles is introduced that leads to excellent colloidal stability in aqueous environments and good protection against disintegration, while permitting surface functionalization via simple carbodiimide chemistry. We have demonstrated the excellent potential of this strategy using upconversion nanoparticles (UCNPs), initially coated with oleate and therefore dispersible only in organic solvents. The hydrophobic oleate capping is maintained and a bilayer is formed upon addition of excess oleate. The bilayer approach renders protection towards luminescence loss by water quenching, while the incorporation of additional molecules containing amino functions yields colloidal stability and facilitates the introduction of functionality. The biological relevance of the approach was confirmed with the use of two model dyes, a photosensitizer and a nitric oxide (NO) probe that, when attached to the surface of the UCNPs, retained their functionality to produce singlet oxygen and detect intracellular NO, respectively. We present a simple and fast strategy to protect and functionalize inorganic nanoparticles in biological media, which is important for controlled surface engineering of nanosized materials for theranostic applications.