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updated 7/5/2013 1:17:06 PM ET 2013-07-05T17:17:06

Instagram, Spotify, Square, Pinterest, and the list goes on: It's starting to seem like billion-dollar startup valuations are a dime a dozen. But how does a young company get a billion-dollar price tag?

The below infographic by San Francisco-based startup organization Funders and Founders details how a startup is typically valued. A valuation is simply an estimated value of a company and is often based on assumptions about a startup's potential. It's not an exact science, explains Anna Vital, the author of the infographic in a blog post. A company's valuation is important because it can determine the percentage of the company that should be given to an investor in exchange for cash, Vital says.

Related: How Instagram Went From Idea to $1 Billion in Less Than Two Years

Copyright © 2013 Entrepreneur.com, Inc.

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