<PAGE>   1
                                                                  EXHIBIT 10.20

                    CONFIDENTIAL SEVERANCE OPTION AGREEMENT

        THIS CONFIDENTIAL SEVERANCE OPTION AGREEMENT (the "Option Agreement")
is entered into as of August 20, 1997 between Verity, Inc. (the "Company") and
Richard Lo ("Employee").

                                    Recitals

        A.      To provide Employee with additional incentive to remain an
employee of the Company through September 15, 1997 (the "Option Date"), the
Company wishes to provide Employee with an option to obtain the severance
benefits set forth in the form of Confidential Resignation Agreement attached
to this Option Agreement as Exhibit A (the "Resignation Agreement").

        B.      As set forth below, Employee's right to receive such benefits
shall be conditioned upon his continued diligent and professional services on
behalf of the Company in his capacity as the Company's Vice President, US and
International Sales, through the Option Date.

                                   Agreement

        ACCORDINGLY, the parties agree as follows:

        1.      Option Grant. The Company hereby grants Employee the option to
obtain the severance benefits as set forth in the Resignation Agreement,
subject to the terms and conditions of the Resignation Agreement and of this
Option Agreement (the "Option").

        2.      Option Exercise Requirements. Subject to Section 4 below, the
Option may be exercised by Employee only between the period commencing on
September 5, 1997 and ending on September 15, 1997 (the "Option Period"). To
exercise the Option, Employee must execute the Resignation Agreement and
deliver such executed agreement to the Company (delivered to the attention of
the Company's Chief Executive Officer or his designee) during the Exercise
Period. Subject to Employee's compliance with the other terms and conditions of
this Option Agreement, promptly following the Company's receipt of the executed
Resignation Agreement, the Company shall cause the Resignation Agreement to be
duly executed on behalf of the Company and delivered to Employee. Subject to
Section 4 below, the "Effective Date", as defined in the Resignation Agreement,
shall be the date of exercise of the Option.

        3.      Certain Conditions Applicable to Option. Employee's right to
exercise the Option, and the Company's obligation to provide the benefits and
otherwise perform the obligations set forth in the Resignation Agreement and
this Agreement, is subject to the following:

                a.      Employee shall continue to serve diligently,
professionally and to the best of his ability on behalf of the Company in his
capacity as the Company's Vice President, US and International Sales, through
the Option Date.

                b.      Employee's employment shall not have been terminated
either (i) by Employee voluntarily or (ii) by the Company with cause on or
before the Option Date. For the purposes of this Agreement, the term "cause"
shall mean (i) Employee's violation of any provision of his Assignment of
Inventions and Nondisclosure Agreement with the Company dated August 24, 1995
(the "Confidentiality Agreement") or of Section 7 of this Option Agreement,
(ii) any act of theft or dishonesty by Employee, (iii) any immoral or illegal
act by Employee which has a detrimental effect on the business or reputation of
the Company or its affiliates, (iv) Employee's failure to provide service to
the Company in compliance with the standard of Section 3(a) above or (v) any
material failure by Employee to perform assigned duties after written notice
and a reasonable opportunity to comply with such notice.



                                       1

<PAGE>   2
        4.  Effect of Early Termination Without Cause.  If (i) prior to the
Option Date, the Company terminates Employee's employment without cause (as
defined above) ("Early Termination") and (ii) at all times prior to such Early
Termination, Employee has provided service to the Company in compliance with
the standard of Section 3(a) above, then Employee shall be entitled to exercise
the Option as of the date of such Early Termination. In such event, the
"Effective Date," as defined in the Resignation Agreement, shall be deemed to
be the date of such Early Termination.

        5.  Employment Status.  Notwithstanding the terms of this Agreement and
without limiting Employee's right hereunder, the parties agree that Employee is
employed by the Company on an "at will" basis. Accordingly, Employee may
terminate his employment by the Company at any time, and the Company may
terminate Employee's employment at any time, with or without cause and for any
reason. 

        6.  ARBITRATION.  The parties agree that any and all disputes, claims
and causes of action, in law or in equity, arising from or relating to this
Option Agreement, the Resignation Agreement or the enforcement, performance,
breach or interpretation of such agreements, shall be resolved by final and
binding confidential arbitration through Judicial Arbitration & Mediation
Services/Endispute, Inc. ("JAMS") under the then-existing JAMS Rules of Practice
an Procedure, to be conducted in Santa Clara County, California. Any such
arbitration shall be conducted in the utmost secrecy. However, this arbitration
provision shall not be the exclusive remedy for any disputes or claims arising
from the Confidentiality Agreement including, but not limited to, disputes or
claims relating to or arising out of the misuse or misappropriation of the
Company's trade secrets or proprietary information. Furthermore, nothing in this
paragraph is intended to prevent either party from obtaining injunctive relief
in court to prevent irreparable harm pending the conclusion of such arbitration.
In the event of any dispute relating to or arising out of this Option Agreement
or the Resignation Agreement, the prevailing party shall be entitled to recover
from the losing party its attorneys' fees and costs incurred in that action. 

        7.  Confidentiality.  Employee agrees that he shall not directly or
indirectly disclose, and he represents that he has not previously directly or
indirectly disclosed, any of the terms of this Option Agreement, including its
exhibit, to anyone other than his immediate family or counsel, except as such
disclosure may be required for accounting or tax reporting purposes or as
otherwise may be required by law.

        8.  Miscellaneous.  This Option Agreement, including the exhibit to
this Option Agreement, constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior negotiations
and employment and other agreements, whether written or oral, with the
exception of any agreements described in Paragraph 5 of the Resignation
Agreement and the stock option agreements entered into between the parties. This
Agreement may not be altered or amended except by a written document signed by
the Company and Employee.

        Executed effective as of the date first written above.

VERITY, INC.                            EMPLOYEE

By                              
   --------------------------           ---------------------------
                                        Richard Lo

Its
   --------------------------


                                       2
<PAGE>   3
                    EXHIBIT A TO SEVERANCE OPTION AGREEMENT

                       CONFIDENTIAL RESIGNATION AGREEMENT
                         AND GENERAL RELEASE OF CLAIMS

        1.      This is to confirm that I, Richard Lo, hereby resign from my
positions as an employee and officer of Verity, Inc. (the "Company") effective
as of September 15, 1997 (the "Resignation Date").

        2.      In exchange for the release of claims set forth below, the
Company agrees to provide me with the following benefits:

                (a)     During the period commencing on September 16, 1997 and
                        ending on March 15, 1998 (the "Severance Period"), the
                        Company agrees to pay to me the amount of $15,166.66 on
                        or about the first day of October, November and December
                        1997, and January, February and March 1998. I understand
                        that, on the Resignation Date, the Company will refund
                        me the cash balance in my account for the Company's
                        Employee Stock Purchase Plan to date and the Company
                        will also pay to me the dollar amount of my accrued and
                        unused vacation and floating holiday time as of the
                        Resignation Date.

                (b)     I will remain eligible to receive commissions earned by
                        and owed to me, if any, with respect to bookings made
                        and cash collections received through August 31, 1997
                        solely under my current compensation plan
                        ("Commissions"). Any such Commissions will be paid in
                        accordance with the Company's schedule for commission
                        payments generally to its sales force; the last payments
                        of such Commissions, if any, will be made on or before
                        September 30, 1997. "Commissions" shall only be earned
                        to the extent of applicable commissions based on
                        contracts with customers executed as of August 31, 1997
                        for which I would otherwise be entitled to receive
                        booking or collections credit ("Current Contracts")
                        under my current compensation plan, and shall be net of
                        the draw component of my compensation. "Commissions"
                        will not be payable with respect to any revenue based on
                        any customer's expanding or altering its relationship
                        with the Company beyond the rights and obligations set
                        forth in its Current Contract after August 31, 1997.

                (c)     We agree that, with respect to my outstanding options to
                        purchase shares of the Company's common stock (all of
                        which are described below), the following number of
                        shares will be considered "Unvested Shares" and


                                       1
<PAGE>   4
                        "Vested Shares," respectively, pursuant to the
                        respective stock option agreement, and the portion of
                        each such option represented by such "Unvested Shares"
                        shall be deemed canceled as of the Resignation Date and
                        will not be exercised by me.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
    Grant Date              Shares Subject      Number of Unvested      Number of Vested
Relating to Option             to Grant              Shares                   Shares
    Agreement
-------------------------------------------------------------------------------------------
<S>                         <C>                 <C>                     <C>

08/31/95                    9,000               3,375                   5,625

03/17/97                    80                  32                      48                    

03/17/97                    8,800               5,683                   3,117

03/17/97                    60,000              41,252                  18,748

</TABLE>


                (d)     Section 7.1(c) of each of my stock option agreements
                        referenced above shall be amended to change the
                        references therein from "one(1) month" to "six (6)
                        months."


                (e)     I agree that I shall not make any critical or
                        disparaging statements to any person or entity regarding
                        the Company, its products or its past, current or future
                        employees, officers or directors.


        I understand and acknowledge that I shall not be entitled to any
benefits from the Company other than those expressly set forth in this
paragraph. 

        3.      In exchange for the benefits described above, I and my
successors and assigns release and absolutely discharge the Company and its
shareholders, directors, officers, employees, agents, attorneys, legal
successors and assigns of and from any and all claims, actions and causes of
action, whether known or unknown, which I now have, or at any other time had,
or shall or may have against the Company based upon or arising out of any
matter, cause, fact, thing, act or omission whatsoever occurring or existing at
any time to and including the date hereof, including, but not limited to, any
claims of wrongful discharge, breach of contact or national origin, race, age,
sex, sexual orientation or other discrimination under the Civil Rights Act of
1964, the Age Discrimination In Employment Act of 1967, The Americans With
Disabilities Act, the Fair Employment and Housing Act or any other applicable
law. 

        4.      I acknowledge that I have read section 1542 of the Civil Code
of the State of California which, in its entirety, states:

               A general release does not extend to claims which
               creditor does not know or suspect to exist in his
               favor at the time of executing the release, which if
               known by him must have materially affected his
               settlement with the debtor.



I hereby wave any right or benefit which I have under section 1542 of the Civil
Code of the State of California to the full extent that I may lawfully waive
such rights and benefits pertaining to the subject matter of this general
release of claims.

        5.      I acknowledge and agree that I shall continue to be bound by
and comply with the terms of my Assignment of Inventions and Nondisclosure
Agreement with the Company dated August 24, 1995 (the "Confidentiality
Agreement"). 

        6.      I agree that I shall not directly or indirectly disclose, and I
represent that I have


                                       2
<PAGE>   5
not previously directly or indirectly disclosed, any of the terms of this
Agreement to anyone other than my immediate family or counsel, except as such
disclosure maybe required for accounting or tax reporting purposes or as
otherwise may be required by law.

        7.      The prevailing party shall be entitled to recover from the
losing party its attorneys' fees and costs incurring in any lawsuit or other
action brought to enforce any right arising out of this Agreement.

        8.      This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and agreements, whether written or oral, with the exception of my
Confidential Severance Option Agreement with the Company dated August 20, 1997,
the Confidentiality Agreement, and my stock option agreements described above.
This agreement may not be altered or amended except by a written document
signed by the Company and me.


Dated:______________                    Effective Date:______________

                                        Verity, Inc.

_______________________________         By:___________________________________
Richard Lo
                                        Title:________________________________



                                       3