diff --git a/internal/ignore/rules.go b/internal/ignore/rules.go
index 9bd25b6c..f24fb69d 100644
--- a/internal/ignore/rules.go
+++ b/internal/ignore/rules.go
@@ -94,6 +94,7 @@ func (r *Rules) AddDefaults() {
 	r.parseRule("**/.agentuity-*")
 	r.parseRule("**/biome.json")
 	r.parseRule("**/.DS_Store")
+	r.parseRule("!setup.sh") // Explicitly don't ignore setup.sh
 }
 
 // Add a rule to the ignore set.
@@ -152,6 +153,7 @@ func (r *Rules) Ignore(path string, fi os.FileInfo) bool {
 	}
 
 	var fullWildcard bool
+	var matched bool
 
 	for n, p := range r.patterns {
 		if p.match == nil {
@@ -172,19 +174,19 @@ func (r *Rules) Ignore(path string, fi os.FileInfo) bool {
 		if p.negate {
 			// if full wildcard, we inverse the negation to only match files that match the following rules
 			if fullWildcard {
-				if p.mustDir && fi.IsDir() {
+				if p.mustDir && fi != nil && fi.IsDir() {
 					return false
 				}
 				if p.match(path, fi) {
 					return false
 				}
 			} else {
-				// otherwise, we only match files that don't match the rule
-				if p.mustDir && !fi.IsDir() {
-					return true
+				// For negation rules, if the path matches the pattern, it should NOT be ignored
+				if p.mustDir && fi != nil && !fi.IsDir() {
+					continue
 				}
-				if !p.match(path, fi) {
-					return true
+				if p.match(path, fi) {
+					return false
 				}
 			}
 			continue
@@ -192,14 +194,19 @@ func (r *Rules) Ignore(path string, fi os.FileInfo) bool {
 
 		// If the rule is looking for directories, and this is not a directory,
 		// skip it.
-		if p.mustDir && !fi.IsDir() {
+		if p.mustDir && fi != nil && !fi.IsDir() {
 			continue
 		}
 		if p.match(path, fi) {
-			return true
+			matched = true
+			// Don't return immediately - keep checking for negation rules
 		}
 	}
-	return fullWildcard
+
+	if fullWildcard {
+		return true
+	}
+	return matched
 }
 
 // parseRule parses a rule string and creates a pattern, which is then stored in the Rules object.
diff --git a/internal/ignore/rules_test.go b/internal/ignore/rules_test.go
index e0595d12..2c4f4345 100644
--- a/internal/ignore/rules_test.go
+++ b/internal/ignore/rules_test.go
@@ -36,12 +36,14 @@ func TestRules(t *testing.T) {
 	assert.True(t, rules.Ignore("/Users/foobar/example/.foo.swp", nil))
 	assert.True(t, rules.Ignore("/Users/foobar/example/src/__test__/test_bar.py", nil))
 	assert.True(t, rules.Ignore("/Users/foobar/example/.agentuity-12345", nil))
+	assert.False(t, rules.Ignore("/Users/foobar/setup.sh", nil))
 }
 
 func TestNegateRules(t *testing.T) {
 	rules := Empty()
 	rules.AddDefaults()
-	rules.Add("!**/foo.py")
+	rules.Add("**/*.py")    // First ignore all Python files
+	rules.Add("!**/foo.py") // Then negate foo.py specifically
 	assert.False(t, rules.Ignore("/Users/foobar/example/src/foo.py", nil))
 	assert.False(t, rules.Ignore("foo.py", nil))
 	assert.True(t, rules.Ignore("bar.py", nil))