Why is my Apple Watch 5 not allowing me to set it up?

Family Setup requires a cellular model. It cannot be used with a GPS only model.

click here ➡️ Set up Apple Watch for a family member - Apple Support

What you need

• An Apple Watch Series 4 or later with cellular,* or Apple Watch SE with cellular, with watchOS 7 or later.
• An iPhone 6s or later with iOS 14 or later for the initial watch setup.

According to this section in the link I am posting below is the following:

What you need

• An Apple Watch Series 4 or later with cellular,* or Apple Watch SE with cellular, with watchOS 7 or later.
• An iPhone 6s or later with iOS 14 or later for the initial watch setup.
• An Apple ID for yourself and one for the family member who will use the Apple Watch. Your Apple ID needs to have two-factor authentication turned on.
• A Family Sharing group that includes the person who'll use the Apple Watch. You need to have the role of organizer or parent/guardian to set up an Apple Watch for a family member.

As long as the Apple Watch SE is cellular and your iPhone is iPhone 6s or newer, with iOS 14 or higher, it should work.

The full link --> Set up Apple Watch for a family member - Apple Support

Yes, as posted in my previous reply. Any SE model with Cellular will work.