What makes someone a head shaliach? Is it a self-proclaimed title?
Generally it's the first one in that area.
Some places are trickier and/or controversial, e.g. where there multiple shluchim to a state etc before "head shliach" became a thing.
How does a new shtellar even open up? Does it start with info gleaned from mercaz shlichus? Requests from far-flung baalei batim?
Sometimes it's one of those, I'm sure there are a myriad ways people find places.
Extreme nepotism is an unfortunate side effect of the head shliach territorial system.
Very true. but I don't think it's always as nefarious as it sounds in your post.
True, there are some times it's pretty bad, e.g. the head shliach who's "saving" that city in his state for when hopefully in a few years one of his kids will get married and might want to go there. OTOH, a lot of the time, especially when dealing with carving out little slivers of territory for each shliach, or when having a new sub-mossad, there are a lot of advantages to having family. I believe in many ways it generally makes things cleaner and lower friction. (Of course in these cases, when it does go bad it goes really, really bad.)