This proverb is based on a theory that people who imitate you think that you are cool
, so much so that they would very much like to be
you, hence their imitation is an indirect
form of flattery.
This proverb is usually intoned when a person complains about being copied. It is meant to soften the sting of being imitated, which is undeniably annoying. This tends to happen in a school environment; or between artists, writers, musicians, or in any circumstance when originality is held very high in importance.
I personally never thought the proverb did make much sense, as to be flattered by a person would require one to hold the flatterer in high esteem, and how can anyone esteem a copy-cat?