I'll add my opinions to the sounding board here..
1) I agree with the "let them work to buy it" crowd. The kids will appreciate a car that they have their own time and money invested in much more than a "gimme". Of course, since you'll be the monetary backup, insurer and overall responsible adult, provide guidelines and advice for the purchase. Just because it is their money, don't let them get whatever they want - set some basic rules.
2) Go for the newest car that money can buy. They newer the car, the more sophisticated the active and passive safety features. While no formal studies have been conducted, there have been several informal studies that show newer cars with better safety equipment and designs fare far better than older cars regardless of comparative size.
3) I'd avoid large, ungainly cars. I learned from sailing, that the smaller, more fleet of foot the "vehicle" is, the more you learn from control input and corrections. By this same principle, I'd require a manual transmission too. A lot easier to teach a new driver to drive manual.
4) Above and beyond everything else. regardless of what car you purchase, make sure you set $700 - $1000 aside/ per kid for enrollment into a teen driving clinic and car control clinic. These clinics should be mandatory for all new drivers (and are great refreshers for the experienced drivers too). They teach these kids all the basics (look through the turn, brake before turning, etc.) plus the life savers like skid control, accident avoidance, etc. These clinics generally run about $250 a piece but I'd recommend having them participate in one or both before they are given unrestricted driving privileges and again after a few thousand miles of experience. In many cases, insurance companies offer a discount to "graduates" and your kids will come away with a true appreciation for the dangers of everyday driving plus the tools required to survive those dangers.
And the insurance company will go by the VIN and think it is a 4 banger forever.