(not to mention the amount of balancing I would need to do to make all the weapons equal).

With regard a balancing issue - I would suggest you balance your game based on the maxed out potentials of your mechas and then give consideration to what how many levels and effect are required for each aspect to reach that potential. You will always have some lack of balance in a game where different players have different levels of progression - it is somewhat unavoidable for the most part - though systems such as gear level matchups for games could be used to try and minimise said issue but as you mentioned this would not be necessarily a viable fix with small player pools.

I'm simply clueless as to which one is the best and why! I really don't want to separate the new players from the older ones, and things like levels and new weapons that are unlocked would do just that

As a suggestion you might give consideration to rewarding money/xp via the following conditions:

• successful hit but no damage
• Successful hit with damage
• Successful kill
• Win
• Possible capture flag scenarios etc

By ensuring a person with a starter mech still has the ability to earn xp/money even if not successfully killing an enemy you provide some progression to the player thus allaying their individual concern at not achieving anything. As their mech gets upgraded then obviously their xp/money would increase but this you could counter by increasing costs for higher level upgrades. You might also give consideration to research bonuses/unlocks through salvaging of enemies you have defeated that possess a superior tech - this could also be applied in an approach of damage received - i.e. an attempted reverse engineering by extrapolating what did the damage to you and how.

You might also wish to look into the "World of Tanks" mmo for some insight as the way they manage upgrades, xp etc given a cursory similarity in your idea with theirs.

(not to mention the amount of balancing I would need to do to make all the weapons equal).

With regard a balancing issue - I would suggest you balance your game based on the maxed out potentials of your mechas and then give consideration to what how many levels and effect are required for each aspect to reach that potential. You will always have some lack of balance in a game where different players have different levels of progression - it is somewhat unavoidable for the most part - though systems such as gear level matchups for games could be used to try and minimise said issue but as you mentioned this would not be necessarily a viable fix with small player pools.

I'm simply clueless as to which one is the best and why! I really don't want to separate the new players from the older ones, and things like levels and new weapons that are unlocked would do just that

As a suggestion you might give consideration to rewarding money/xp via the following conditions:

• successful hit but no damage
• Successful hit with damage
• Successful kill
• Win
• Possible capture flag scenarios etc

By ensuring a person with a starter mech still has the ability to earn xp/money even if not successfully killing an enemy you provide some progression to the player thus allaying their individual concern at not achieving anything. As their mech gets upgraded then obviously their xp/money would increase but this you could counter by increasing costs for higher level upgrades.

You might also wish to look into the "World of Tanks" mmo for some insight as the way they manage upgrades, xp etc given a cursory similarity in your idea with theirs.