Nylon strings are easier on a beginner's fingers, but a great many people start their playing on steel strings without problem.
Beside size, three other factors might be good to consider:
1. How soon do you anticipate his being able to get a bigger guitar? Buy a Baby Taylor, for instance, and the size may be fine this year, but by next year he may be wishing for a "real" guitar.
2. How much money are you willing to invest at this point. At ten, I didn't take very good care of my things. My friend was the opposite. He was the type who always made his bed and kept his room neat. Made me sick!
However, he always got the good stuff. His dad told me it was because he took such good care of things. I didn't get it, but I did remember it. If you grandson is this kind of guy, you might look for a nice, used Larrivee parlor. Good sound, great looks, easy to play - I think he might like one a lot better than an inexpensive 3/4 size classical.
3. Will your grandson be taking lessons? I would recommend it highly for his age. If so, it would be a good idea to talk with his teacher before buying a guitar.
The truth is that many of us here started our guitar playing on instruments that were far from ideal. His desire to learn to play is far more important than your success in finding him the perfect guitar.
cotten