Questions come up often about early reader guidelines. Here's some info from a teacher's perspective:
One thing that teachers focus on: In English, the most commonly-used words are often not spelled phonetically (the, for example. and who.) So we teach the first 100 in first grade, the next 100 in second grade. You can find the list here:
Then phonetic words are taught in this order:
Short vowel words with 3-5 letters (cat, frog, splat)
Digraphs (sh, ch, th, wh)
Long vowels, starting with the silent-e rule (kite, cake) and moving into the other spellings (rain, boat, boy, foot.)
Compound words and contractions are sprinkled in there.
Last of all, not usually taught until second grade, are the rules for multi-syllable words.
The more you stick to the beginning of the list, the easier the book is to read.
There is some leeway for including longer words if the context of the story and the illustrations will make it clear--dinosaur, for example, when there's one in the picture. But never, ever use words like "Usually" that are hard to sound out and impossible to draw a picture of.
And then, there are exceptions. The Fancy Nancy books use some amazing vocabulary words, but they are considered early readers. Not so good for most first graders, but perfect for second grade. She explains the words like this: "Gorgeous is a fancy word that means beautiful." I love using her books to teach new words, but it takes a grown-up helping the kid or they can't figure out how to read "gorgeous." (why is it not gore-jowse?)
The other key thing to think about is sentence structure. Clear syntax is even more important than word choice. I'll save that for another lecture...
The other thing to remember is that every publisher has their own guidelines. Sometimes they match what teachers teach, and their books are very easy to use in the classroom. Sometimes they don't. Whenever possible, find out from the publisher what they're looking for.
Also...early readers are hard to sell if you are a debut author. Fancy Nancy, for example, started as a picture book series that sold well, and a line of early readers was developed to follow the same character. So I suggest marketing your books as PBs and letting the publisher decide which format to use, unless you are already working with a publisher specifically to develop an early reader series.