diff --git a/cmd/bd/setup.go b/cmd/bd/setup.go
index 36b2caf1..7bf7321a 100644
--- a/cmd/bd/setup.go
+++ b/cmd/bd/setup.go
@@ -15,7 +15,7 @@ var (
 var setupCmd = &cobra.Command{
 	Use:   "setup",
 	Short: "Setup integration with AI editors",
-	Long:  `Setup integration files for AI editors like Claude Code, Cursor, and Aider.`,
+	Long:  `Setup integration files for AI editors like Claude Code, Cursor, Aider, and Factory.ai Droid.`,
 }
 
 var setupCursorCmd = &cobra.Command{
@@ -66,6 +66,31 @@ must confirm using Aider's /run command.`,
 	},
 }
 
+var setupFactoryCmd = &cobra.Command{
+	Use:   "factory",
+	Short: "Setup Factory.ai (Droid) integration",
+	Long: `Install Beads workflow configuration for Factory.ai Droid.
+
+Creates or updates AGENTS.md with bd workflow instructions.
+Factory Droids automatically read AGENTS.md on session start.
+
+AGENTS.md is the standard format used across AI coding assistants
+(Factory, Cursor, Aider, Gemini CLI, Jules, and more).`,
+	Run: func(cmd *cobra.Command, args []string) {
+		if setupCheck {
+			setup.CheckFactory()
+			return
+		}
+
+		if setupRemove {
+			setup.RemoveFactory()
+			return
+		}
+
+		setup.InstallFactory()
+	},
+}
+
 var setupClaudeCmd = &cobra.Command{
 	Use:   "claude",
 	Short: "Setup Claude Code integration",
@@ -92,6 +117,9 @@ agents from forgetting bd workflow after context compaction.`,
 }
 
 func init() {
+	setupFactoryCmd.Flags().BoolVar(&setupCheck, "check", false, "Check if Factory.ai integration is installed")
+	setupFactoryCmd.Flags().BoolVar(&setupRemove, "remove", false, "Remove bd section from AGENTS.md")
+
 	setupClaudeCmd.Flags().BoolVar(&setupProject, "project", false, "Install for this project only (not globally)")
 	setupClaudeCmd.Flags().BoolVar(&setupCheck, "check", false, "Check if Claude integration is installed")
 	setupClaudeCmd.Flags().BoolVar(&setupRemove, "remove", false, "Remove bd hooks from Claude settings")
@@ -103,6 +131,7 @@ func init() {
 	setupAiderCmd.Flags().BoolVar(&setupCheck, "check", false, "Check if Aider integration is installed")
 	setupAiderCmd.Flags().BoolVar(&setupRemove, "remove", false, "Remove bd config from Aider")
 
+	setupCmd.AddCommand(setupFactoryCmd)
 	setupCmd.AddCommand(setupClaudeCmd)
 	setupCmd.AddCommand(setupCursorCmd)
 	setupCmd.AddCommand(setupAiderCmd)
diff --git a/cmd/bd/setup/factory.go b/cmd/bd/setup/factory.go
new file mode 100644
index 00000000..0246b685
--- /dev/null
+++ b/cmd/bd/setup/factory.go
@@ -0,0 +1,298 @@
+package setup
+
+import (
+	"fmt"
+	"os"
+	"strings"
+)
+
+// Factory/Droid integration markers for AGENTS.md
+const (
+	factoryBeginMarker = "<!-- BEGIN BEADS INTEGRATION -->"
+	factoryEndMarker   = "<!-- END BEADS INTEGRATION -->"
+)
+
+const factoryBeadsSection = `<!-- BEGIN BEADS INTEGRATION -->
+## Issue Tracking with bd (beads)
+
+**IMPORTANT**: This project uses **bd (beads)** for ALL issue tracking. Do NOT use markdown TODOs, task lists, or other tracking methods.
+
+### Why bd?
+
+- Dependency-aware: Track blockers and relationships between issues
+- Git-friendly: Auto-syncs to JSONL for version control
+- Agent-optimized: JSON output, ready work detection, discovered-from links
+- Prevents duplicate tracking systems and confusion
+
+### Quick Start
+
+**Check for ready work:**
+
+` + "```bash" + `
+bd ready --json
+` + "```" + `
+
+**Create new issues:**
+
+` + "```bash" + `
+bd create "Issue title" --description="Detailed context" -t bug|feature|task -p 0-4 --json
+bd create "Issue title" --description="What this issue is about" -p 1 --deps discovered-from:bd-123 --json
+` + "```" + `
+
+**Claim and update:**
+
+` + "```bash" + `
+bd update bd-42 --status in_progress --json
+bd update bd-42 --priority 1 --json
+` + "```" + `
+
+**Complete work:**
+
+` + "```bash" + `
+bd close bd-42 --reason "Completed" --json
+` + "```" + `
+
+### Issue Types
+
+- ` + "`bug`" + ` - Something broken
+- ` + "`feature`" + ` - New functionality
+- ` + "`task`" + ` - Work item (tests, docs, refactoring)
+- ` + "`epic`" + ` - Large feature with subtasks
+- ` + "`chore`" + ` - Maintenance (dependencies, tooling)
+
+### Priorities
+
+- ` + "`0`" + ` - Critical (security, data loss, broken builds)
+- ` + "`1`" + ` - High (major features, important bugs)
+- ` + "`2`" + ` - Medium (default, nice-to-have)
+- ` + "`3`" + ` - Low (polish, optimization)
+- ` + "`4`" + ` - Backlog (future ideas)
+
+### Workflow for AI Agents
+
+1. **Check ready work**: ` + "`bd ready`" + ` shows unblocked issues
+2. **Claim your task**: ` + "`bd update <id> --status in_progress`" + `
+3. **Work on it**: Implement, test, document
+4. **Discover new work?** Create linked issue:
+   - ` + "`bd create \"Found bug\" --description=\"Details about what was found\" -p 1 --deps discovered-from:<parent-id>`" + `
+5. **Complete**: ` + "`bd close <id> --reason \"Done\"`" + `
+
+### Auto-Sync
+
+bd automatically syncs with git:
+
+- Exports to ` + "`.beads/issues.jsonl`" + ` after changes (5s debounce)
+- Imports from JSONL when newer (e.g., after ` + "`git pull`" + `)
+- No manual export/import needed!
+
+### Important Rules
+
+- ✅ Use bd for ALL task tracking
+- ✅ Always use ` + "`--json`" + ` flag for programmatic use
+- ✅ Link discovered work with ` + "`discovered-from`" + ` dependencies
+- ✅ Check ` + "`bd ready`" + ` before asking "what should I work on?"
+- ❌ Do NOT create markdown TODO lists
+- ❌ Do NOT use external issue trackers
+- ❌ Do NOT duplicate tracking systems
+
+For more details, see README.md and docs/QUICKSTART.md.
+
+<!-- END BEADS INTEGRATION -->
+`
+
+// InstallFactory installs Factory.ai/Droid integration
+func InstallFactory() {
+	agentsPath := "AGENTS.md"
+
+	fmt.Println("Installing Factory.ai (Droid) integration...")
+
+	// Check if AGENTS.md exists
+	var currentContent string
+	data, err := os.ReadFile(agentsPath)
+	if err == nil {
+		currentContent = string(data)
+	} else if !os.IsNotExist(err) {
+		fmt.Fprintf(os.Stderr, "Error: failed to read AGENTS.md: %v\n", err)
+		os.Exit(1)
+	}
+
+	// If file exists, check if we already have beads section
+	if currentContent != "" {
+		if strings.Contains(currentContent, factoryBeginMarker) {
+			// Update existing section
+			newContent := updateBeadsSection(currentContent)
+			if err := atomicWriteFile(agentsPath, []byte(newContent)); err != nil {
+				fmt.Fprintf(os.Stderr, "Error: write AGENTS.md: %v\n", err)
+				os.Exit(1)
+			}
+			fmt.Println("✓ Updated existing beads section in AGENTS.md")
+		} else {
+			// Append to existing file
+			newContent := currentContent + "\n\n" + factoryBeadsSection
+			if err := atomicWriteFile(agentsPath, []byte(newContent)); err != nil {
+				fmt.Fprintf(os.Stderr, "Error: write AGENTS.md: %v\n", err)
+				os.Exit(1)
+			}
+			fmt.Println("✓ Added beads section to existing AGENTS.md")
+		}
+	} else {
+		// Create new AGENTS.md with template
+		newContent := createNewAgentsFile()
+		if err := atomicWriteFile(agentsPath, []byte(newContent)); err != nil {
+			fmt.Fprintf(os.Stderr, "Error: write AGENTS.md: %v\n", err)
+			os.Exit(1)
+		}
+		fmt.Println("✓ Created new AGENTS.md with beads integration")
+	}
+
+	fmt.Printf("\n✓ Factory.ai (Droid) integration installed\n")
+	fmt.Printf("  File: %s\n", agentsPath)
+	fmt.Println("\nFactory Droid will automatically read AGENTS.md on session start.")
+	fmt.Println("No additional configuration needed!")
+}
+
+// CheckFactory checks if Factory.ai integration is installed
+func CheckFactory() {
+	agentsPath := "AGENTS.md"
+
+	// Check if AGENTS.md exists
+	data, err := os.ReadFile(agentsPath)
+	if os.IsNotExist(err) {
+		fmt.Println("✗ AGENTS.md not found")
+		fmt.Println("  Run: bd setup factory")
+		os.Exit(1)
+	} else if err != nil {
+		fmt.Fprintf(os.Stderr, "Error: failed to read AGENTS.md: %v\n", err)
+		os.Exit(1)
+	}
+
+	// Check if it contains beads section
+	content := string(data)
+	if strings.Contains(content, factoryBeginMarker) {
+		fmt.Println("✓ Factory.ai integration installed:", agentsPath)
+		fmt.Println("  Beads section found in AGENTS.md")
+	} else {
+		fmt.Println("⚠ AGENTS.md exists but no beads section found")
+		fmt.Println("  Run: bd setup factory (to add beads section)")
+		os.Exit(1)
+	}
+}
+
+// RemoveFactory removes Factory.ai integration
+func RemoveFactory() {
+	agentsPath := "AGENTS.md"
+
+	fmt.Println("Removing Factory.ai (Droid) integration...")
+
+	// Read current content
+	data, err := os.ReadFile(agentsPath)
+	if os.IsNotExist(err) {
+		fmt.Println("No AGENTS.md file found")
+		return
+	} else if err != nil {
+		fmt.Fprintf(os.Stderr, "Error: failed to read AGENTS.md: %v\n", err)
+		os.Exit(1)
+	}
+
+	content := string(data)
+
+	// Check if beads section exists
+	if !strings.Contains(content, factoryBeginMarker) {
+		fmt.Println("No beads section found in AGENTS.md")
+		return
+	}
+
+	// Remove beads section
+	newContent := removeBeadsSection(content)
+
+	// If file would be empty after removal, delete it
+	trimmed := strings.TrimSpace(newContent)
+	if trimmed == "" {
+		if err := os.Remove(agentsPath); err != nil {
+			fmt.Fprintf(os.Stderr, "Error: failed to remove AGENTS.md: %v\n", err)
+			os.Exit(1)
+		}
+		fmt.Println("✓ Removed AGENTS.md (file was empty after removing beads section)")
+	} else {
+		// Write back modified content
+		if err := atomicWriteFile(agentsPath, []byte(newContent)); err != nil {
+			fmt.Fprintf(os.Stderr, "Error: write AGENTS.md: %v\n", err)
+			os.Exit(1)
+		}
+		fmt.Println("✓ Removed beads section from AGENTS.md")
+	}
+}
+
+// updateBeadsSection replaces the beads section in existing content
+func updateBeadsSection(content string) string {
+	start := strings.Index(content, factoryBeginMarker)
+	end := strings.Index(content, factoryEndMarker)
+
+	if start == -1 || end == -1 || start > end {
+		// Markers not found or invalid, append instead
+		return content + "\n\n" + factoryBeadsSection
+	}
+
+	// Replace section between markers (including end marker line)
+	endOfEndMarker := end + len(factoryEndMarker)
+	// Find the next newline after end marker
+	nextNewline := strings.Index(content[endOfEndMarker:], "\n")
+	if nextNewline != -1 {
+		endOfEndMarker += nextNewline + 1
+	}
+
+	return content[:start] + factoryBeadsSection + content[endOfEndMarker:]
+}
+
+// removeBeadsSection removes the beads section from content
+func removeBeadsSection(content string) string {
+	start := strings.Index(content, factoryBeginMarker)
+	end := strings.Index(content, factoryEndMarker)
+
+	if start == -1 || end == -1 || start > end {
+		return content
+	}
+
+	// Find the next newline after end marker
+	endOfEndMarker := end + len(factoryEndMarker)
+	nextNewline := strings.Index(content[endOfEndMarker:], "\n")
+	if nextNewline != -1 {
+		endOfEndMarker += nextNewline + 1
+	}
+
+	// Also remove leading blank lines before the section
+	trimStart := start
+	for trimStart > 0 && (content[trimStart-1] == '\n' || content[trimStart-1] == '\r') {
+		trimStart--
+	}
+
+	return content[:trimStart] + content[endOfEndMarker:]
+}
+
+// createNewAgentsFile creates a new AGENTS.md with a basic template
+func createNewAgentsFile() string {
+	return `# Project Instructions for AI Agents
+
+This file provides instructions and context for AI coding agents working on this project.
+
+` + factoryBeadsSection + `
+
+## Build & Test
+
+_Add your build and test commands here_
+
+` + "```bash" + `
+# Example:
+# npm install
+# npm test
+` + "```" + `
+
+## Architecture Overview
+
+_Add a brief overview of your project architecture_
+
+## Conventions & Patterns
+
+_Add your project-specific conventions here_
+`
+}
diff --git a/docs/CLI_REFERENCE.md b/docs/CLI_REFERENCE.md
index e20a605f..d0df387c 100644
--- a/docs/CLI_REFERENCE.md
+++ b/docs/CLI_REFERENCE.md
@@ -557,16 +557,19 @@ bd sync  # Force immediate sync, bypass debounce
 
 ```bash
 # Setup editor integration (choose based on your editor)
+bd setup factory  # Factory.ai Droid - creates/updates AGENTS.md (universal standard)
 bd setup claude   # Claude Code - installs SessionStart/PreCompact hooks
 bd setup cursor   # Cursor IDE - creates .cursor/rules/beads.mdc
 bd setup aider    # Aider - creates .aider.conf.yml
 
 # Check if integration is installed
+bd setup factory --check
 bd setup claude --check
 bd setup cursor --check
 bd setup aider --check
 
 # Remove integration
+bd setup factory --remove
 bd setup claude --remove
 bd setup cursor --remove
 bd setup aider --remove
@@ -580,6 +583,7 @@ bd setup claude --stealth    # Use stealth mode (flush only, no git operations)
 ```
 
 **What each setup does:**
+- **Factory.ai** (`bd setup factory`): Creates or updates AGENTS.md with beads workflow instructions (works with multiple AI tools using the AGENTS.md standard)
 - **Claude Code** (`bd setup claude`): Adds hooks to Claude Code's settings.json that run `bd prime` on SessionStart and PreCompact events
 - **Cursor** (`bd setup cursor`): Creates `.cursor/rules/beads.mdc` with workflow instructions
 - **Aider** (`bd setup aider`): Creates `.aider.conf.yml` with bd workflow instructions
diff --git a/docs/SETUP.md b/docs/SETUP.md
index 320851e9..8bcb11a2 100644
--- a/docs/SETUP.md
+++ b/docs/SETUP.md
@@ -5,10 +5,11 @@
 
 ## Overview
 
-The `bd setup` command configures beads integration with AI coding tools. It supports three integrations:
+The `bd setup` command configures beads integration with AI coding tools. It supports four integrations:
 
 | Tool | Command | Integration Type |
 |------|---------|-----------------|
+| [Factory.ai (Droid)](#factoryai-droid) | `bd setup factory` | AGENTS.md file (universal standard) |
 | [Claude Code](#claude-code) | `bd setup claude` | SessionStart/PreCompact hooks |
 | [Cursor IDE](#cursor-ide) | `bd setup cursor` | Rules file (.cursor/rules/beads.mdc) |
 | [Aider](#aider) | `bd setup aider` | Config file (.aider.conf.yml) |
@@ -17,16 +18,107 @@ The `bd setup` command configures beads integration with AI coding tools. It sup
 
 ```bash
 # Install integration for your tool
+bd setup factory   # For Factory.ai Droid (and other AGENTS.md-compatible tools)
 bd setup claude    # For Claude Code
 bd setup cursor    # For Cursor IDE
 bd setup aider     # For Aider
 
 # Verify installation
+bd setup factory --check
 bd setup claude --check
 bd setup cursor --check
 bd setup aider --check
 ```
 
+## Factory.ai (Droid)
+
+Factory.ai Droid integration uses the AGENTS.md standard, which is compatible with multiple AI coding assistants.
+
+### Installation
+
+```bash
+# Create or update AGENTS.md with beads integration
+bd setup factory
+```
+
+### What Gets Installed
+
+Creates or updates `AGENTS.md` in your project root with:
+- Issue tracking workflow instructions
+- Quick command reference
+- Issue types and priorities
+- Auto-sync explanation
+- Important rules for AI agents
+
+The beads section is wrapped in HTML comments (`<!-- BEGIN/END BEADS INTEGRATION -->`) for safe updates.
+
+### AGENTS.md Standard
+
+AGENTS.md is an industry-standard format for AI coding agent instructions, supported by:
+- **Factory.ai Droid** - Specialized coding agents
+- **Cursor** - Also reads AGENTS.md (in addition to .cursor/rules)
+- **Aider** - Can be configured to read AGENTS.md
+- **Gemini CLI** - Google's command-line AI assistant
+- **Jules** - Google's coding assistant
+- **Codex** - OpenAI's code generation model
+- **Zed** - AI-enhanced editor
+- And many more emerging tools
+
+Using AGENTS.md means one configuration file works across your entire AI tool ecosystem.
+
+### Flags
+
+| Flag | Description |
+|------|-------------|
+| `--check` | Check if beads section exists in AGENTS.md |
+| `--remove` | Remove beads section from AGENTS.md |
+
+### Examples
+
+```bash
+# Check if beads section is in AGENTS.md
+bd setup factory --check
+# Output: ✓ Factory.ai integration installed: AGENTS.md
+#         Beads section found in AGENTS.md
+
+# Remove beads section
+bd setup factory --remove
+```
+
+### How It Works
+
+Factory Droid and other AGENTS.md-compatible tools automatically read `AGENTS.md` from:
+1. Current working directory (`./AGENTS.md`)
+2. Parent directories up to repo root
+3. Personal override (`~/.factory/AGENTS.md`)
+
+The beads section teaches AI agents:
+- To use `bd ready` for finding work
+- To use `bd create` for tracking new issues
+- To use `bd sync` at session end
+- The complete workflow pattern and best practices
+
+### Updating Existing AGENTS.md
+
+If you already have an AGENTS.md file with other project instructions:
+- `bd setup factory` will **append** the beads section
+- Re-running it will **update** the existing beads section (idempotent)
+- The markers (`<!-- BEGIN/END BEADS INTEGRATION -->`) ensure safe updates
+
+### When to Use This vs Other Integrations
+
+**Use Factory integration when:**
+- ✅ You use Factory.ai Droid
+- ✅ You want one config file for multiple AI tools
+- ✅ You prefer the AGENTS.md standard
+- ✅ Your team uses multiple AI coding assistants
+
+**Use other integrations when:**
+- ✅ You only use Claude Code → `bd setup claude` (hooks are more dynamic)
+- ✅ You need tool-specific features (like Claude's stealth mode)
+
+You can use multiple integrations simultaneously - they complement each other!
+
 ## Claude Code
 
 Claude Code integration uses hooks to automatically inject beads workflow context at session start and before context compaction.
@@ -185,22 +277,31 @@ This respects Aider's philosophy of keeping humans in control while still levera
 
 ## Comparison
 
-| Feature | Claude Code | Cursor | Aider |
-|---------|-------------|--------|-------|
-| Command execution | Automatic | Automatic | Manual (/run) |
-| Context injection | Hooks | Rules file | Config file |
-| Global install | Yes | No (per-project) | No (per-project) |
-| Stealth mode | Yes | N/A | N/A |
+| Feature | Factory.ai | Claude Code | Cursor | Aider |
+|---------|-----------|-------------|--------|-------|
+| Command execution | Automatic | Automatic | Automatic | Manual (/run) |
+| Context injection | AGENTS.md | Hooks | Rules file | Config file |
+| Global install | No (per-project) | Yes | No (per-project) | No (per-project) |
+| Stealth mode | N/A | Yes | N/A | N/A |
+| Standard format | Yes (AGENTS.md) | No (proprietary) | No (proprietary) | No (proprietary) |
+| Multi-tool compatible | Yes | No | No | No |
 
 ## Best Practices
 
-1. **Install globally for Claude Code** - You'll get beads context in every project automatically
+1. **Start with Factory integration** - Creates AGENTS.md which works across multiple AI tools:
+   ```bash
+   bd setup factory
+   ```
 
-2. **Install per-project for Cursor/Aider** - These tools expect project-local configuration
+2. **Add tool-specific integrations as needed** - Claude hooks, Cursor rules, or Aider config for tool-specific features
 
-3. **Use stealth mode in CI/CD** - `bd setup claude --stealth` avoids git operations that might fail in automated environments
+3. **Install globally for Claude Code** - You'll get beads context in every project automatically
 
-4. **Run `bd doctor` after setup** - Verifies the integration is working:
+4. **Use stealth mode in CI/CD** - `bd setup claude --stealth` avoids git operations that might fail in automated environments
+
+5. **Commit AGENTS.md to git** - This ensures all team members and AI tools get the same instructions
+
+6. **Run `bd doctor` after setup** - Verifies the integration is working:
    ```bash
    bd doctor | grep -i claude
    # Claude Integration: Hooks installed (CLI mode)