What does a cash-starved company do when it needs to raise new equity but doesn't want to wash out the financial interests of its current shareholders and other investors? Seven-year-old Houston Biotechnology, in The Woodlands, Tex., faced that quandary earlier this year. Its solution: design a special stock offering for those who funded the company's early operations. Using that approach, the ophthalmic-drug company raised $3.3 million last August. More equity will be available if investors exercise their stock-purchase warrants.

Houston Biotech began scouting for capital in 1991, says CEO Russell Denson, when the cash from two prior financings -- an equity deal and a research-and-development partnership -- was starting to thin. Partly because of weak investor demand for biotech stocks, the prospects for a conventional stock offering seemed dim. "We recognized we'd have to sell stock at well below what we thought it was worth," Denson says. That's when the company hit on the idea of giving first "rights" to new stock to the existing stable of investors, an approach that's more typical in Europe than in the United States.

Houston Biotech devised a formula based on the level of an individual's original investment. "It allowed us to go out and market to each person directly," notes Denson. Those with a $10,000 stake in the company, for instance, automatically were given 1,000 new shares of stock; for $2,500 more they got 500 additional shares, plus warrants to buy 250 extra shares at $5 each within two years, $10 each for three years thereafter. Participants in the deal could also purchase a limited number of additional shares for even less. Overall, says Denson, about 15% of the eligible investors bought into the offering.