I start off with what I call a "seed." Like, for example, "Wouldn't it be cool if my character was the best swordswoman in the land?" Then I think to myself, "Ok. What sort of things need to happen so that this can happen?" To continue that example, "Well, people don't become swords masters overnight. Clearly, this woman is a noble, with time and training put in. But if she's the best, then she needs to have incentive to /be/ the best. Maybe her family is evil. But wait. Evil noble family, wouldn't they have gotten destroyed? Well, yes, but they fulfill a function very necessary to the realm. But wait, evil noble families are evil because of the lust for power generally. Wouldn't they have tried to keep her down? Well, yeah, but there's one good family member who likes her. Why are they good? Well, they're literally a bastard child from the previous generation, so they're removed from the conflict while simultaneously privy to the family politics. Wait, why are they there? Because they're powerful enough to be respected even though they don't have a claim to the noble title." And so it cascades, with things filling in as I draw conclusions, justifications, flaws that would develop in the character's psyche. And then, in the story proper, I figure out "OK, how can I use this all to be extra mean to her?" and go from there.