diff --git a/packages/app/src/cli/services/dev/app-events/app-event-watcher.ts b/packages/app/src/cli/services/dev/app-events/app-event-watcher.ts
index d2f4c16ac5..a1c4b670b3 100644
--- a/packages/app/src/cli/services/dev/app-events/app-event-watcher.ts
+++ b/packages/app/src/cli/services/dev/app-events/app-event-watcher.ts
@@ -223,7 +223,7 @@ export class AppEventWatcher extends EventEmitter {
       return useConcurrentOutputContext({outputPrefix: ext.handle, stripAnsi: false}, async () => {
         try {
           if (this.esbuildManager.contexts[ext.handle]) {
-            await this.esbuildManager.contexts[ext.handle]?.rebuild()
+            await this.esbuildManager.rebuildContext(ext)
           } else {
             await this.buildExtension(ext)
           }
diff --git a/packages/app/src/cli/services/dev/app-events/app-watcher-esbuild.ts b/packages/app/src/cli/services/dev/app-events/app-watcher-esbuild.ts
index fec1fab652..2dc89991fb 100644
--- a/packages/app/src/cli/services/dev/app-events/app-watcher-esbuild.ts
+++ b/packages/app/src/cli/services/dev/app-events/app-watcher-esbuild.ts
@@ -3,6 +3,8 @@ import {ExtensionInstance} from '../../../models/extensions/extension-instance.j
 import {getESBuildOptions} from '../../extensions/bundle.js'
 import {BuildContext, context as esContext} from 'esbuild'
 import {AbortSignal} from '@shopify/cli-kit/node/abort'
+import {copyFile} from '@shopify/cli-kit/node/fs'
+import {dirname} from '@shopify/cli-kit/node/path'
 
 export interface DevAppWatcherOptions {
   dotEnvVariables: {[key: string]: string}
@@ -65,6 +67,22 @@ export class ESBuildContextManager {
     await Promise.all(promises)
   }
 
+  async rebuildContext(extension: ExtensionInstance) {
+    const context = this.contexts[extension.handle]
+    if (!context) return
+    await context.rebuild()
+
+    // The default output path for a extension is now inside `.shopify/bundle/<ext_id>/dist`,
+    // all extensions output need to be under the same directory so that it can all be zipped together.
+
+    // But historically the output was inside each extension's directory.
+    // To avoid breaking flows that depend on this, we copy the output to the old location.
+    // This also makes it easier to access sourcemaps or other built artifacts.
+    const outputPath = dirname(extension.getOutputPathForDirectory(this.outputPath))
+    const copyPath = dirname(extension.outputPath)
+    await copyFile(outputPath, copyPath)
+  }
+
   async updateContexts(appEvent: AppEvent) {
     this.dotEnvVariables = appEvent.app.dotenv?.variables ?? {}
     const createdEsBuild = appEvent.extensionEvents