Multilayer dielectric (MLD) gratings with high diffraction efficiency and a high laser-induced damage (LID) threshold for pulse compressors are key to scaling the peak and average power of chirped pulse amplification lasers. However, surface defects introduced by manufacturing, storage, and handling processes can reduce the LID resistance of MLD gratings and impact the laser output. The underlying mechanisms of such defect-initiated LID remain unclear, especially in the femtosecond regime. In this Letter, we model dynamic processes in interactions of a 20-fs near-infrared (NIR) laser pulse and a MLD grating design in the presence of cylindrically symmetrical nodules and particle contaminants and cracks at the surface. Utilizing a dynamic model based on a 2D finite difference in time domain (FDTD) field solver coupled with photoionization, electron collision, and refractive index modification, we study the simulation results for the damage site distribution initiated by defects of various types and sizes and its impact on the LID threshold of the grating design.