diff --git a/pygls/capabilities.py b/pygls/capabilities.py
index fcc9cf02..9557370d 100644
--- a/pygls/capabilities.py
+++ b/pygls/capabilities.py
@@ -14,13 +14,12 @@
 # See the License for the specific language governing permissions and      #
 # limitations under the License.                                           #
 ############################################################################
-from functools import reduce
-from typing import Any, Dict, List, Optional, Set, Union, TypeVar
 import logging
+from functools import reduce
+from typing import Any, Dict, List, Optional, Set, TypeVar, Union
 
 from lsprotocol import types
 
-
 logger = logging.getLogger(__name__)
 T = TypeVar("T")
 
@@ -62,6 +61,7 @@ def __init__(
         commands: List[str],
         text_document_sync_kind: types.TextDocumentSyncKind,
         notebook_document_sync: Optional[types.NotebookDocumentSyncOptions] = None,
+        position_encoding: types.PositionEncodingKind = types.PositionEncodingKind.Utf16,
     ):
         self.client_capabilities = client_capabilities
         self.features = features
@@ -71,12 +71,35 @@ def __init__(
         self.notebook_document_sync = notebook_document_sync
 
         self.server_cap = types.ServerCapabilities()
+        self.server_cap.position_encoding = position_encoding
 
     def _provider_options(self, feature: str, default: T) -> Optional[Union[T, Any]]:
         if feature in self.features:
             return self.feature_options.get(feature, default)
         return None
 
+    @classmethod
+    def choose_position_encoding(
+        cls, client_capabilities: types.ClientCapabilities
+    ) -> types.PositionEncodingKind:
+        server_encoding = types.PositionEncodingKind.Utf16
+
+        if (general := client_capabilities.general) is None:
+            return server_encoding
+
+        if (encodings := general.position_encodings) is None:
+            return server_encoding
+
+        # We match client preference where this an overlap between its and our supported encodings.
+        for client_encoding in encodings:
+            if client_encoding in _SUPPORTED_ENCODINGS:
+                server_encoding = client_encoding
+                return server_encoding
+
+        logger.warning(f"Unknown `PositionEncoding`s: {encodings}")
+
+        return server_encoding
+
     def _with_text_document_sync(self):
         open_close = (
             types.TEXT_DOCUMENT_DID_OPEN in self.features
@@ -415,27 +438,6 @@ def _with_inline_value_provider(self):
             self.server_cap.inline_value_provider = value
         return self
 
-    def _with_position_encodings(self):
-        self.server_cap.position_encoding = types.PositionEncodingKind.Utf16
-
-        general = self.client_capabilities.general
-        if general is None:
-            return self
-
-        encodings = general.position_encodings
-        if encodings is None:
-            return self
-
-        # We match client preference where this an overlap between its and our supported encodings.
-        for encoding in encodings:
-            if encoding in _SUPPORTED_ENCODINGS:
-                self.server_cap.position_encoding = encoding
-                return self
-
-        logger.warning(f"Unknown `PositionEncoding`s: {encodings}")
-
-        return self
-
     def _build(self):
         return self.server_cap
 
@@ -474,6 +476,5 @@ def build(self):
             ._with_workspace_capabilities()
             ._with_diagnostic_provider()
             ._with_inline_value_provider()
-            ._with_position_encodings()
             ._build()
         )
diff --git a/pygls/protocol/language_server.py b/pygls/protocol/language_server.py
index 709631d9..9f5b431d 100644
--- a/pygls/protocol/language_server.py
+++ b/pygls/protocol/language_server.py
@@ -130,7 +130,9 @@ def lsp_exit(self, *args) -> None:
             sys.exit(returncode)
 
     @lsp_method(types.INITIALIZE)
-    def lsp_initialize(self, params: types.InitializeParams) -> types.InitializeResult:
+    def lsp_initialize(
+        self, params: types.InitializeParams
+    ) -> Generator[Any, Any, types.InitializeResult]:
         """Method that initializes language server.
         It will compute and return server capabilities based on
         registered features.
@@ -142,19 +144,9 @@ def lsp_initialize(self, params: types.InitializeParams) -> types.InitializeResu
         text_document_sync_kind = self._server._text_document_sync_kind
         notebook_document_sync = self._server._notebook_document_sync
 
-        # Initialize server capabilities
         self.client_capabilities = params.capabilities
-        self.server_capabilities = ServerCapabilitiesBuilder(
-            self.client_capabilities,
-            set({**self.fm.features, **self.fm.builtin_features}.keys()),
-            self.fm.feature_options,
-            list(self.fm.commands.keys()),
-            text_document_sync_kind,
-            notebook_document_sync,
-        ).build()
-        logger.debug(
-            "Server capabilities: %s",
-            json.dumps(self.server_capabilities, default=self._serialize_message),
+        position_encoding = ServerCapabilitiesBuilder.choose_position_encoding(
+            self.client_capabilities
         )
 
         root_path = params.root_path
@@ -162,13 +154,32 @@ def lsp_initialize(self, params: types.InitializeParams) -> types.InitializeResu
         if root_path is not None and root_uri is None:
             root_uri = from_fs_path(root_path)
 
-        # Initialize the workspace
+        # Initialize the workspace before yielding to the user's initialize handler
         workspace_folders = params.workspace_folders or []
         self._workspace = Workspace(
             root_uri,
             text_document_sync_kind,
             workspace_folders,
-            self.server_capabilities.position_encoding,
+            position_encoding,
+        )
+
+        if (user_handler := self.fm.features.get(types.INITIALIZE)) is not None:
+            yield user_handler, (params,), None
+
+        # Now that the user has had the opportunity to setup additional features, calculate
+        # the server's capabilities
+        self.server_capabilities = ServerCapabilitiesBuilder(
+            self.client_capabilities,
+            set({**self.fm.features, **self.fm.builtin_features}.keys()),
+            self.fm.feature_options,
+            list(self.fm.commands.keys()),
+            text_document_sync_kind,
+            notebook_document_sync,
+            position_encoding,
+        ).build()
+        logger.debug(
+            "Server capabilities: %s",
+            json.dumps(self.server_capabilities, default=self._serialize_message),
         )
 
         return types.InitializeResult(
diff --git a/tests/test_feature_manager.py b/tests/test_feature_manager.py
index 119af551..5ceadc2a 100644
--- a/tests/test_feature_manager.py
+++ b/tests/test_feature_manager.py
@@ -18,6 +18,8 @@
 from typing import Any
 
 import pytest
+from lsprotocol import types as lsp
+
 from pygls.capabilities import ServerCapabilitiesBuilder
 from pygls.exceptions import (
     CommandAlreadyRegisteredError,
@@ -29,7 +31,6 @@
     has_ls_param_or_annotation,
     wrap_with_server,
 )
-from lsprotocol import types as lsp
 
 
 class Temp:
@@ -704,13 +705,13 @@ def _():
         [],
         None,
         None,
+        ServerCapabilitiesBuilder.choose_position_encoding(capabilities),
     ).build()
 
     assert expected == actual
 
 
 def test_register_prepare_rename_no_client_support(feature_manager: FeatureManager):
-
     @feature_manager.feature(lsp.TEXT_DOCUMENT_RENAME)
     def _():
         pass
@@ -734,7 +735,6 @@ def _():
 
 
 def test_register_prepare_rename_with_client_support(feature_manager: FeatureManager):
-
     @feature_manager.feature(lsp.TEXT_DOCUMENT_RENAME)
     def _():
         pass