<PAGE>
 
                                                                    EXHIBIT 10.1

August 3, 1998

Mr. Bob Knowling
[Address]


Dear Bob:

The Board of Directors (the "Board") of Covad Communications Group, Inc.
("Covad" or the "Company") is pleased to extend to you this agreement to be
employed by Covad on the terms described below.  You will join Covad as a full
time employee in the role of President and Chief Executive Officer, reporting to
the Board. While you are employed by the Company, you will also be a member of
the Board. You will be covered by the Company's Change in Control Policy (as
defined below).  Your monthly salary will be thirty three thousand three hundred
thirty three dollars ($33,333).

You will also receive a signing bonus of one million five hundred thousand
dollars ($1,500,000), one half of which will be paid on commencement of your
employment and the remaining one half of which will be paid on your one year
anniversary or, if earlier, the date on which a Change in Control (as defined
below) occurs, if you are employed by the Company at that time.  If your
employment terminates prior to such one-year anniversary or, if earlier, the
date of a Change in Control, the remaining one-half will be paid at the time of
such employment termination if such termination occurs by reason of your death
or your being Disabled, for Good Reason, or by the Company other than for Cause
(as those terms are defined below).  If your employment with the Company
terminates for any other reason prior to such one-year anniversary or, if
earlier, the date of a Change in Control, you will forfeit the remaining one-
half of your signing bonus.

In addition you will be offered a stock option to purchase one million four
hundred thousand (1,400,000) shares of Covad Common Stock at the price of $1.50
per share.  The option will be designated as an incentive stock option, as that
term is defined in Code section 422, to the extent that it can qualify as an
incentive stock option based on the following vesting schedule.  To the extent
that the full 1.4 million shares cannot be made subject to an incentive stock
option, the remainder will be granted as a non-qualified stock option. The
option will become exercisable based on Covad's standard vesting schedule (six
forty eighth's of the shares vested on your six month anniversary with the
Company and one forty eighth per month for the next forty two months).
Notwithstanding the foregoing, (i) the option will become fully exercisable one
year from the date of a Change in Control, if you are employed by the Company on
that date; (ii) the 
<PAGE>
 
Page 2


option will become fully exercisable at any time following the date of a Change
in Control if your employment terminates by reason of your death or your being
Disabled, for Good Reason, or by the Company other than for Cause; and (iii) if
your employment terminates prior to the occurrence of a Change in Control, by
reason of your death or your being Disabled, for Good Reason, or by the Company
other than for Cause, the exercisability of the option on your date of
termination shall be determined under the regular vesting schedule of the
option, but applied as though you had been employed through the six-month
anniversary following your actual date of termination. After the option becomes
exercisable, it will remain exercisable for the period continuing until the
eight-year anniversary of the date of grant, provided that you are employed by
the Company through that date. Notwithstanding the preceding sentence, the
option, or portion thereof, that is exercisable (or becomes exercisable) upon
your termination of employment shall remain exercisable for a period of one year
following your date of termination, if your termination occurs by reason of your
death or your being Disabled, and shall remain exercisable for a period of 90
days following your date of termination if your termination occurs for any other
reason, provided that in no event will the option be exercisable later than the
eight-year anniversary of the date of grant of the option.

Also, as we discussed, you will participate in an annual bonus program that will
pay a cash bonus based on your performance to the objectives the Board will set
for the Company.  However, for 1998, you are guaranteed a minimum bonus of two
hundred fifty thousand dollars ($250,000).  For subsequent years, the bonus will
vary from this amount depending on your actual performance to the objectives,
provided that your annual bonus opportunity will be not less than $250,000.

To assist in your relocation to  California, the Company will loan you five
hundred thousand dollars ($500,000) in a full recourse note toward the purchase
of a home in the Bay area secured by your stock option.  This loan will be
forgiven at the rate of 25% per year on your employment anniversary date with
the Company.  It will become immediately due and payable should you voluntarily
leave the Company or are terminated for Cause.  Covad will also pay the interest
on this loan while you are an employee.  If a Change in Control occurs while you
are employed by the Company, or if your employment with the Company is
terminated by reason of death, your being Disabled, for Good Reason, or by the
Company other than for Cause, any unpaid principal and interest on the loan will
be forgiven.

In the event that your employment with the Company is terminated for Good
Reason, or by the Company other than for Cause, the Company will continue your
base salary plus targeted bonus for an additional two years from your
termination date, provided that you do not become employed by a company directly
competing with Covad.
<PAGE>
 
Page 3


You shall not be required to mitigate the amount of any payment provided for in
this letter by seeking other employment or otherwise.  The Company shall be
entitled to set off against the amounts payable to you under this letter, any
amounts owed to the Company by you, but shall not be entitled to set off against
the amounts payable to you under this letter any amounts earned by you in other
employment after termination of your employment with the Company, or any amounts
which might have been earned by you in other employment had you sought such
other employment.

As with all employees, you will be responsible for paying all applicable taxes
related to your employment with Covad including income and other taxes on your
salary, bonus, signing bonus, real estate loan, debt forgiveness and interest
payments, capital gains taxes on Covad stock and stock options and any income or
excise taxes that apply to severance or change of control payments that may be
made to you.  The Company will pay for the one-time consulting services of a
compensation attorney for you to use to review this agreement and its tax
implications.

At Covad, benefits are also an important part of your total compensation. These
programs are: comprehensive health coverage under either an HMO or PPO option,
dental coverage, also under either a PPO or HMO option, vision care, a tax-
advantaged 401(k) plan, a flexible spending plan account, disability insurance,
group life insurance and three weeks of paid vacation/sick leave per year.  As a
Covad employee you will be eligible to participate in these benefit programs
starting on the first day of your employment.  Additionally, Covad will continue
your current split life insurance policy or put in place an equivalent policy.

For purposes of this letter, the terms listed below shall be defined as
indicated:

(1)  Your employment shall be considered to have been terminated for "Cause"
     only if the termination is because of:

     (a)  the willful and continued failure by you to substantially perform your
     duties with the Company (other than any such failure resulting from your
     being Disabled), within a reasonable period of time after a written demand
     for substantial performance is delivered to you by the Board, which demand
     specifically identifies the manner in which the Board believes that you
     have not substantially performed your duties;

     (b)  the willful engaging by you in conduct which is demonstrably and
     materially injurious to the Company, monetarily or otherwise; or
<PAGE>
 
Page 4


     (c)  the engaging by you in egregious misconduct involving serious moral
     turpitude to the extent that, in the reasonable judgment of the Board, your
     credibility and reputation no longer conform to the standard of the
     Company's executives.

     For purposes of this letter, no act, or failure to act, on your part shall
     be deemed "willful" unless done, or omitted to be done, by you not in good
     faith and without reasonable belief that your action or omission was in the
     best interest of the Company.

(2)  "Change in Control" is defined as set forth in the Change in Control
     Policy.  The "Change in Control Policy" shall be the change in control
     policy as in effect on the date you are initially employed by the Company,
     a copy of which is attached to this letter.

(3)  Your employment shall be considered to have been terminated for "Good
     Reason" if you resign from the employ of the Company after any of the
     following circumstances:

     (a)  The assignment to you of any duties inconsistent with your position
     and status as President and Chief Executive Officer of the Company, or a
     material adverse change in the nature or status of your responsibilities or
     reporting relationship with the Board.

     (b)  You fail to be elected or reelected to the Board.

     (c)  A reduction by the Company in your annual base salary to an amount
     that is less than required under this agreement.

     (d)  The relocation of your base office to an office that is more than 50
     highway miles of your base office on the Effective Date.

     (e)  The failure of the Company to obtain a satisfactory agreement from any
     successor to assume and agree to perform this agreement.

     (f)  Any material breach of this agreement by the Company not described in
     paragraphs (a) through (e) next above.
<PAGE>
 
Page 5


     Your right to terminate your employment for Good Reason shall not be
     affected by your incapacity due to physical or mental illness.  Your
     continued employment shall not constitute consent to, or a waiver of rights
     with respect to, any circumstance constituting Good Reason hereunder for a
     period of 90 days following the occurrence of such circumstance.

(4)  You shall be considered "Disabled" during any period in which you have a
     physical or mental disability which renders you incapable, after reasonable
     accommodation, of performing your duties under this letter and you shall
     not be required to perform your duties for the Company, as described under
     this letter, during any period you are Disabled.

This agreement is contingent on the completion of the following requirements:

1)   You sign Covad's Employee Confidentiality and Inventions Agreement, a copy
     of which is attached, and which, among other things, obligates you not to
     reveal any Covad confidential information, not to bring with you to Covad
     any non-public, proprietary information of your previous employer or any
     other party, not to disclose such information to Covad, and to continue to
     honor any existing confidentiality obligations you have to your previous
     employer or any other company.  It also assigns Covad any rights you may
     have in work related inventions you may develop while at Covad.

2)   You sign Covad's Restricted Stock Option Agreement which among other things
     requires you to acknowledge that your shares of Covad are not currently
     marketable, may never become marketable, and are subject to restrictions
     and prohibitions on sales and other transfers until they become marketable.

Please sign and return this agreement acknowledging the employment terms
contained here, including our mutual understanding that these terms constitute
your entire compensation package, that your employment is "at will" and not
subject to any employment agreement other than this agreement and the agreements
referred in paragraph (1) and (2) above, that you will devote your full time to
Covad and that you will not engage in any other employment or contracting
without the prior written consent of Covad.
<PAGE>
 
Page 6




Sincerely,                           Agreed and Accepted


/s/ Charles J. McMinn
Charles J. McMinn                    /s/ Robert E. Knowling, Jr.
                                     ---------------------------
Chief Executive Officer                  Robert E. Knowling
Covad Communications Group, Inc.
                                     Date: ________________, 1998