The α₇ acetylcholine receptor (AChR) mediates pre- and postsynaptic neurotransmission in the central nervous system and is a potential therapeutic target in neurodegenerative, neuropsychiatric and inflammatory disorders. We determined the crystal structure of the extracellular domain of a receptor chimera constructed from the human α₇ AChR and Lymnaea stagnalis acetylcholine binding protein (AChBP), which shares 64% sequence identity and 71% similarity with native α₇. We also determined the structure with bound epibatidine, a potent AChR agonist. Comparison of the structures revealed molecular rearrangements and interactions that mediate agonist recognition and early steps in signal transduction in α₇ AChRs. The structures further revealed a ring of negative charge within the central vestibule, poised to contribute to cation selectivity. Structure-guided mutational studies disclosed distinctive contributions to agonist recognition and signal transduction in α₇ AChRs. The structures provide a realistic template for structure-aided drug design and for defining structure–function relationships of α₇ AChRs.