diff --git a/package.json b/package.json
index b82db78a5..70aaa7220 100644
--- a/package.json
+++ b/package.json
@@ -23,7 +23,8 @@
     "changeset": "changeset",
     "version-packages": "changeset version",
     "release": "pnpm -r --filter '!@composio/ao-web' build && changeset publish",
-    "prepare": "husky"
+    "prepare": "husky",
+    "postinstall": "node scripts/rebuild-node-pty.js"
   },
   "devDependencies": {
     "@changesets/cli": "^2.29.8",
diff --git a/scripts/rebuild-node-pty.js b/scripts/rebuild-node-pty.js
new file mode 100644
index 000000000..a659f9a2f
--- /dev/null
+++ b/scripts/rebuild-node-pty.js
@@ -0,0 +1,39 @@
+#!/usr/bin/env node
+// Automatically rebuild node-pty from source after pnpm install
+// This fixes DirectTerminal "posix_spawnp failed" errors from incompatible prebuilt binaries
+
+import { execSync } from "node:child_process";
+import { existsSync } from "node:fs";
+import { join, dirname } from "node:path";
+import { fileURLToPath } from "node:url";
+
+const __filename = fileURLToPath(import.meta.url);
+const __dirname = dirname(__filename);
+const repoRoot = join(__dirname, "..");
+
+// Find node-pty in pnpm node_modules
+const nodePtyPath = join(
+  repoRoot,
+  "node_modules/.pnpm/node-pty@1.1.0/node_modules/node-pty",
+);
+
+if (!existsSync(nodePtyPath)) {
+  console.log("ℹ️  node-pty not found, skipping rebuild");
+  process.exit(0);
+}
+
+console.log("🔧 Rebuilding node-pty from source...");
+
+try {
+  execSync("npx node-gyp rebuild", {
+    cwd: nodePtyPath,
+    stdio: "inherit",
+  });
+  console.log("✅ node-pty rebuilt successfully");
+} catch (error) {
+  console.warn("⚠️  node-pty rebuild failed (non-critical)");
+  console.warn("   DirectTerminal may not work correctly");
+  console.warn("   Run manually: cd node_modules/.pnpm/node-pty@1.1.0/node_modules/node-pty && npx node-gyp rebuild");
+  // Don't fail the install - node-pty rebuild failure is non-critical
+  process.exit(0);
+}
diff --git a/scripts/setup.sh b/scripts/setup.sh
index 9f56d63a6..2d495a38c 100755
--- a/scripts/setup.sh
+++ b/scripts/setup.sh
@@ -19,11 +19,6 @@ pnpm install
 echo "🔨 Building all packages..."
 pnpm build
 
-echo "🔧 Rebuilding node-pty from source (fixes DirectTerminal)..."
-cd node_modules/.pnpm/node-pty@1.1.0/node_modules/node-pty
-npx node-gyp rebuild > /dev/null 2>&1 || echo "⚠️  node-pty rebuild failed (non-critical)"
-cd ../../../../..
-
 echo "🔗 Linking CLI globally..."
 cd packages/cli
 npm link