diff --git a/backend/app/services/espidf_compiler.py b/backend/app/services/espidf_compiler.py
index 48587c65..b8d6fed3 100644
--- a/backend/app/services/espidf_compiler.py
+++ b/backend/app/services/espidf_compiler.py
@@ -567,47 +567,80 @@ class ESPIDFCompiler:
         comp_dir = user_libs_dir / safe_name
         comp_dir.mkdir(parents=True, exist_ok=True)
 
-        # Collect all source files — preserve subdirectory structure via INCLUDE_DIRS
-        # We copy files flat into the component root but add src/ as an include dir
-        cpp_files: list[str] = []
-        seen_names: set[str] = set()
+        # Preserve the original library layout for actual buildable library code
+        # while skipping repo-only content such as examples, tests, and CI files.
+        lib_root = src_root.parent if src_root.name == 'src' else src_root
+        include_dirs: set[str] = {'.'}
+        cpp_files: set[str] = set()
+        copied_any = False
 
-        for pattern in ('*.h', '*.cpp', '*.c', 'src/*.h', 'src/*.cpp', 'src/*.c'):
-            for f in src_root.parent.glob(pattern) if pattern.startswith('src/') else src_root.glob(pattern):
-                if not f.is_file():
-                    continue
-                dest = comp_dir / f.name
-                if f.name not in seen_names:
-                    shutil.copy2(f, dest)
-                    seen_names.add(f.name)
-                if f.suffix in ('.cpp', '.c') and f.name not in cpp_files:
-                    cpp_files.append(f.name)
+        has_src_layout = (lib_root / 'src').is_dir()
+        excluded_dirs = {
+            '.git',
+            '.github',
+            '.vscode',
+            '__pycache__',
+            'docs',
+            'doc',
+            'example',
+            'examples',
+            'test',
+            'tests',
+            'extras',
+            'ci',
+            'fuzz',
+            'fuzzing',
+            'benchmark',
+            'benchmarks',
+        }
 
-        # Also copy from src/ subdirectory if present (e.g. Adafruit libraries)
-        src_sub = src_root / 'src' if (src_root / 'src').is_dir() else None
-        if src_sub is None and (src_root.parent / 'src').is_dir():
-            src_sub = src_root.parent / 'src'
-        if src_sub:
-            for f in src_sub.glob('**/*'):
-                if not f.is_file() or f.suffix not in ('.h', '.cpp', '.c'):
-                    continue
-                if f.name not in seen_names:
-                    shutil.copy2(f, comp_dir / f.name)
-                    seen_names.add(f.name)
-                if f.suffix in ('.cpp', '.c') and f.name not in cpp_files:
-                    cpp_files.append(f.name)
+        def should_include(relative_path: Path) -> bool:
+            parts = relative_path.parts
+            if any(part.lower() in excluded_dirs for part in parts[:-1]):
+                return False
+            if relative_path.suffix not in ('.h', '.hpp', '.c', '.cpp'):
+                return False
+
+            if has_src_layout:
+                return parts[0] == 'src' or len(parts) == 1
+
+            return len(parts) == 1 or parts[0].lower() == 'utility'
+
+        for f in lib_root.rglob('*'):
+            if not f.is_file():
+                continue
+            rel_path = f.relative_to(lib_root)
+            if not should_include(rel_path):
+                continue
+            dest = comp_dir / rel_path
+            dest.parent.mkdir(parents=True, exist_ok=True)
+            shutil.copy2(f, dest)
+            copied_any = True
+            include_dirs.add(str(rel_path.parent).replace('\\', '/'))
+            if f.suffix in ('.cpp', '.c'):
+                cpp_files.add(str(rel_path).replace('\\', '/'))
+
+        if not copied_any:
+            raise ValueError(f'No buildable source files found in library {lib_dir_name}')
 
         # Generate CMakeLists.txt for this component
+        include_dirs.discard('.')
+        ordered_include_dirs = ['.'] + sorted(d for d in include_dirs if d and d != '.')
+
         if cpp_files:
             srcs_line = 'SRCS ' + ' '.join(f'"{f}"' for f in sorted(cpp_files))
         else:
             srcs_line = '# header-only library'
 
+        include_dirs_line = 'INCLUDE_DIRS ' + ' '.join(
+            f'"{include_dir}"' for include_dir in ordered_include_dirs
+        )
+
         cmake_content = (
             f'# Auto-generated by Velxio for library: {lib_dir_name}\n'
             f'idf_component_register(\n'
             f'    {srcs_line}\n'
-            f'    INCLUDE_DIRS "."\n'
+            f'    {include_dirs_line}\n'
             f'    REQUIRES {arduino_comp_name}\n'
             f')\n'
         )